This article will help you to learn about the difference between joint product and joint cost.
Difference between Joint Product and Joint Cost
Difference # Joint Product:
Production processes are integrated sets of activities that combine and transform inputs into desired outputs. Inputs needed in a production process may include materials (raw materials, supplies, and parts made by others); labour (various skills); capital; and management (know-how, planning, organising and motivating), as also land.
Output of production processes are the goods and services produced. Some processes yield more than one output. Petroleum refineries, for example, produces a variety of fuels, oils, greases, and other products. Products emanating from the same processes are called joint products.
The cream substitute marketed under the brand name Pream in the USA was initially a joint product with the baby milk substitute marketed under the brand name of Similac. Both products are very profitable for the company producing them.
Pream is made from an extract of powdered Similac. The extract was initially thrown away. Later on Pream’s commercial potential was realised by biochemists and marketing people—first as a food substitute for gastreatic patients in India, later for coffee drinkers in the USA. Consequently the production process was changed so as to ensure optimum utilisation of all inputs. However, all joint products are not compatible. They are not desirable either.
There are various other examples of joint products. There was a time when pineapple juice was considered to be a waste product. It had negative value, implying that time, effort and other resources had to be spent to get rid of it in an acceptable manner. Other products of negative value are derived from oil and gas wells and nuclear wastes.
Undesirable joint products increase internal costs of production as producers compensate persons adversely affected by the products. Today, pineapple juice is a highly marketable joint product, one capable of generating substantial revenues. From waste materials sugar factories produce khandsari or even alcohol. Thus in many production processes the increase or decrease in production of one good is inseparately linked to a greater or lesser extent with the production of another.
Difference # Joint Cost:
A related concept is the concept of joint costs. A classic example of joint costs is that of meat production. Meat packers sell products- to both restaurants and leather tanners. Prices are governed by demand and not by individual product costs. The objective is to set prices at levels that will clear the market for both meat and hides. Output will be at levels that will equal the marginal revenue from both meat and hides to the marginal cost of producing both.
An increase in the demand for hides increases the supply of goats, which in turn brings about an automatic shift (increase) in the supply curve of meat. As a result, if the demand for meat remains unchanged, the price of meat will fall.
Sometimes, we make use of the term by-product. A by-product is a product which is secondary to the main product emerging from a particular production process. An example of this is the refining of crude oil, to produce petroleum. The production process generates a range of by-products like naptha and creosote.
Sometimes both these products require services of some facility that will be fully utilised. Therefore, output of any one product can be increased only by reducing the output of the other product. Such products are called alternative products.
In case of alternative products marginal cost depends only on hours of plant operation and does not change as the plant is switched from one product to another. The firm maximises profit if it selects a product mix such that the marginal revenue (per unit of plant facility used) is equal to marginal cost (per unit of facility used) at total output.