Joint supply is a situation in which two or more goods are produced together by a single process, so that increasing the output of one automatically increases the output of the others. Classic examples are beef and hides from cattle, mutton and wool from sheep, and the petrol, diesel, jet fuel and other products that come out of refining crude oil. The goods are called joint products; when one is much less valuable than the main product, it is called a by-product.
The idea was discussed by the neoclassical economist Alfred Marshall in his Principles of Economics (1890), alongside the related idea of joint demand for complementary goods. It matters because it links the markets for goods that consumers may see as unrelated: a change in demand for one joint product shifts the supply of the others and moves their prices.
Joint supply in plain terms
Think of a butcher who buys whole chickens. Every chicken comes with breasts, legs, wings and bones, whether customers want them or not. If a craze for chicken wings makes the butcher buy many more chickens, they also end up with far more breasts and legs, and may have to sell them cheaply to clear the fridge.
That is joint supply. You cannot get one part without the others, so what happens to one product spills over onto the rest. The butcher's question is not "what does a wing cost me?" but "what can I earn from the whole chicken?"
How joint supply links markets
When joint products come in fixed proportions, a rise in demand for one raises its price and makes it profitable to process more of the raw material. That increases the supply of the other products, so their prices tend to fall, other things being equal. A fall in demand for one does the reverse. For example, rising demand for beef increases the slaughter of cattle and therefore the supply of hides to the leather industry.
In equilibrium with fixed proportions, it is the combined revenue from the bundle that must cover the cost of producing it:
- and are the prices of one unit each of the two joint products.
- is the marginal cost of producing one more unit of the combined bundle.
Worked example: if processing one more animal costs $1,000 and yields one unit of meat and one hide, then meat at $900 and a hide at $100 just cover the cost. If demand for leather collapses and hides fetch only $40, meat must sell for $960 to keep production unchanged; otherwise fewer animals are processed and both products become scarcer.
Where proportions can be varied, as in refining, producers adjust the mix toward the more valuable product, but only within technical limits.
Joint supply in energy and commodity markets
Oil refining is the most important modern case. Refiners cannot make only petrol; each barrel of crude, a globally traded commodity, yields a range of products. The margin they earn is tracked through crack spreads, which compare the price of crude with the prices of the products made from it. A widely quoted measure, the 3-2-1 crack spread, assumes three barrels of crude yield two barrels of petrol and one of diesel or heating oil:
Worked example: with crude at $70 a barrel, petrol at $100.80 a barrel and diesel at $109.20 a barrel, the spread is dollars per barrel of crude processed.
Other examples in commodities markets include:
- Metals. Much silver is mined as a by-product of lead, zinc and copper, and most cobalt comes from copper and nickel mines, so their supply depends partly on demand for the main metal and responds weakly to their own spot price.
- Agriculture. Cotton fiber and cottonseed, and cheese and whey, are produced together; for agriculture, a by-product can turn into a valuable product in its own right.
- Natural gas. Gas production can yield natural gas liquids such as ethane and propane alongside methane.
Allocating joint costs
Because joint products share one process, there is no economically exact way to say how much of the shared cost belongs to each product. Accountants still need figures for inventory valuation and pricing. Common methods allocate joint costs by relative sales value, by physical quantity, or by net realizable value, and treat minor by-products separately. International accounting standard IAS 2 allows joint costs to be allocated on a rational and consistent basis, such as relative sales value. These allocations are useful for reporting but can mislead pricing decisions: the economically relevant question is whether total revenue from all products covers the joint cost, including fixed costs, and the separate variable costs of further processing.
Joint supply also differs from economies of scale and from economies of scope. Scope economies arise when a firm chooses to make several products more cheaply together; joint supply arises when the technology leaves no choice. Understanding the distinction helps explain prices of raw materials, the elasticity of by-product supply and the effect of supply shocks, such as refinery outages, on several fuels at once.