What Is Joint Supply?
When multiple products are derived from the same source and at the same expense, the products are said to be in joint supply. The notion of joint supply is an economic concept that relates to supply and demand. Products that are derived from a single source are tied together for purposes of supply. An increase in the supply of one product necessitates an increase in the supply of the other. Depending on market conditions and the underlying demand for each product, this relationship can have a positive or negative affect on price.
Joint supply exists when two or more products originate from the same source. For example, a farmer who raises sheep can use the sheep for wool, meat and sheepskin. Each of these products have distinct markets but come from one animal. These products can only be in joint supply if they can be produced simultaneously. If one product can only be produced instead of the other, there is no simultaneous supply relationship.
Economic theory is always concerned with supply and demand. Experts track how the increase or decrease in the supply of a product makes demand for the product change and results in a change in the price. An example may be shown with oil supply. The perception of the availability, or supply, of oil can cause a temporary increase in demand, particularly if people sense a shortage, driving the price of gasoline up.
Products that are in joint supply cannot typically be analyzed separately. Since multiple product come from one source, an increase in the supply of one will increase the supply of the other. In the example of sheep farming, an increase in the supply of wool will likely also increase the supply of mutton, in an efficient operation. Demand for the two products, however, are not always equal.
If a sheep farmer responds to a market demand for mutton, he will simultaneous flood the market for wool. The wool might not be in particular demand, so the additional supply will drive wool prices down. Analysts keep a close eye on products in joint supply because investments in one can be significantly impacted by what happens with the other.
Another important issue that involves products in joint supply is the allocation of expenses. Since both products are derived from the same source, it is often difficult to figure out how to divide up expenses. It is not usually feasible to simply split the expenses down the middle in the case of two products, because one product usually sells for more than the other. An equal split will artificially deflate or inflate profits on one product or the other. Likewise, randomly allocating expenses will produce artificial results.
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