10.5.4 Joint products
With joint products the production interrelationship is inevitable; when product X is produced, product Y will also be produced, whether this is desired or not. It is useful to classify such joint products into two main categories: those that are produced in fixed proportions and those that are produced in variable proportions.
a. Joint products produced in fixed proportions This situation is easier to analyse because the products cannot be effectively separated from a production or cost standpoint, and therefore such products are not really multiple products at all, but are really product bundles.
b. Joint products produced in variable proportions This is again a more complicated situation, but, as usual, a more realistic one. An exact fixity of proportions is usually only observed in chemical reactions, when compounds are transformed into other substances in particular quantities according to the laws of physics. Otherwise there is some flexibility in the processes involved that can increase or decrease the proportions according to profitability. The most common method of analysing this situation is to use a graphical approach, involving isocost and isorevenue curves. This is illustrated in Figure 10.4
The concave (to the origin) curves on the graph are isocost curves: these curves represent combinations of outputs which can be produced at the same total cost. For example, TC1 represents a total cost of 25 units; given this cost it is possible to produce X1 units of X along with Y1 units of Y, or X2 units of X along with Y2 units of Y, or any other combination of X and Y on the same curve. The isocost curves are shown as being concave to the origin, because it is assumed that there are diminishing returns in producing more of one product.
The sloping straight lines on the graph are isorevenue curves: these curves represent combinations of outputs which result in the same total revenue. These curves are shown as linear, which implicitly involves the assumption that the firm is a price-taker in each of the product markets. Points of tangency between isocost and isorevenue curves represent profit-maximization positions for any given cost or revenue. Thus point A on TC1 and TR1 yields more profit than any other point on TC1 or TR1; any other point on TC1 will produce less revenue and therefore less profit, while any other point on TR1 will involve more cost and therefore less profit. In order to find the overall profit-maximizing combination of outputs we have to find the point of tangency with the highest profit; this occurs at point C, where combined profit from selling X and Y is 12 units. The optimal outputs of X and Y are therefore X3 and Y3.