When two or more commodities come into existence as a result of a single process and with the same expenses, they are said to be in joint supply.
For example, if we want to raise the output of wheat, the production of straw will be automatically increased. So is the case with the production of mutton and wool, cotton and cottonseeds, beef and hide, gas and coal, etc. The less important product in joint cost, whose price is low, is called joint products.
The question is to be tackled here as to how the price of each separate product is determined in the market? For the purpose of analysis, we divide joint products into two distant sections:
(1) Products whose proportion can be varied.
(2) Products whose proportions cannot be varied.
We take both these cases and discuss them one by one.
(1) Joint Products whose Proportion can be Varied:
In case of those products whose proportions are variable, it is possible to find out the marginal cost of each product separately.
In Australia and New Zealand, for example, it has been found possible to produce mutton and wool in variable proportions by cross breeding sheep. We can have a breed of sheep which yield more mutton and less wool or less mutton and more wool.
The marginal cost of production of each product can be found by considering the quantity of one commodity to remain the same and the other to increase. When we get marginal cost of production of one by applying the marginal analysis, then the commodities become separate. The firm equates marginal cost and price of each product and the total output will be regulated as such in the short period.
In case of long run, normal price of the joint products, it is not possible to ascertain the average cost of the production. So, we cannot equate price and average cost. What we have to do is to balance total cost of producing the joint product and the total receipts from the sale of the commodities. When the total receipts and the total costs are equal, firm is in equilibrium.
(2) Joint Products whose Proportions cannot be Varied:
When the proportions of the joint products are not variable, a rise in the output of one commodity must necessarily be accompanied by a rise in the supply of the other.
If, for example, the price of cotton rises and output of cotton is increased, the total quantity of cotton seed will also increase automatically. In such conditions, it becomes impossible to separate the marginal cost of such product by increasing its output individually. Under these circumstances, the market price of each product is determined by the interaction of the forces of demand and supply at that particular moment. In case of long run equilibrium, the total receipts of a firm must be equal to its total cost.