How Prices of Joint Products are Determined?

The following article will guide you about how prices of joint products are determined.

In the case of joint products, goods are jointly produced and their production costs are jointly incurred. Under perfect competition, the price of a product is equal to its marginal cost, but in the case of joint products the marginal cost of each of these goods cannot be separately determined. For this reason, a separate theory of value is necessary to determine their prices.

For laying down the principles of value determination of joint products, Alfred Marshall has classified these goods into two groups.

A. Joint products in variable proportions:

There are some joint products where the relative proportion in the produc­tion of the goods can be varied. The joint products can give more wool and belong to this group. One variety of sheep can give more wool and less mutton and the other variety, less wool and more mutton.

In such cases, by varying the proportion in the production of wool and mutton, one can determine the marginal cost of each separately through a special method. Let us suppose one sheep of a particular variety (more wool and less mutton) gives 10 units of wool and 8 units of mutton at the cost of Rs. 24. Another sheep of another variety (less wool and more mutton) gives 8 units of wool and 10 units of mutton at a cost of Rs. 30.

We take 8 sheep of the first variety wherefrom we get 10 units of wool and 64 units of mutton at the total cost of Rs. 192. From 10 sheep’s of the second variety we get 80 units of wool and 100 units of mutton at a total cost of Rs. 300.

By subtraction, we get the cost of one unit mutton at Rs. 3. So, the price of mutton should be equal to this marginal cost of mutton determined in this special way. In the same way, the separate marginal cost of wool can be obtained, and the price of wool will be, under the competitive situation, equal to that separate marginal cost of wool.

B. Joint products in fixed proportions:

In such cases of joint products the relative proportion in the production of the two goods cannot be altered. The joint products like cotton fibre and cotton seeds belong to this category.

The following principles are to be followed to determine the prices of these joint cost goods:

(i) Combined prices:

Their combined prices should be such that the total sale proceeds from these goods must at least cover their total expenses. If the total costs, for example, of 4 units of cotton fibre and 2 units of cotton seeds are Rs. 50, the combined prices of them should be such that the total sale proceeds of these two goods must be at least Rs. 50.

(ii) Individual prices:

The price of each of the joint products is to be fixed in accordance with its elasticity of demand or in accordance with the principle what one may call “charging the prices what the traffic can bear”. It means that a higher price will be charged for the product whose demand is inelastic and a lower price for the one whose demand is elastic.

(iii) Minimum prices:

The variable expenses or prime costs (separately incurred) of each of these goods set the limit below which the price of each should not fall. The overhead charges or fixed expenses (jointly incurred) should be added to the price of each in accordance with the elasticity of demand of each of these goods.

Conclusion:

It is to be noted that, if there is an increase in the demand for one of the joint products, the supply of both will increase, and since there will be a larger supply of the second product, its price will fall. Similarly, a fall in the demand for one of the joint products will tend to increase the price of the other.