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Joint Demand Supply

 Joint Demand Supply

Introduction

            In our study of product pricing under perfect competition we progressed on the hypothesis that the price of one article is self-sufficient of the prices of other merchandise. This is idealistic. Commodities are either surrogates or complementary. Being interconnected, a variation in the price or demand or supply of one will influence the price of others.

Joint Demand

Joint Demand denotes the association amidst two or more merchandise or services when they are demanded mutually. There is joint demand for cars and petrol, pens and ink, tea and sugar etc.

  • Jointly Demanded Goods are Complementary – A hike in the price of one leads to a drop in the demand for the other and vice versa. For instance, a hike in price of cars will fetch a drop in their demand mutually with the demand for petrol and lower its price, if the supply of the petrol remains unaffected. Alternatively, a drop in the price of cars as a consequent of a drop in the cost of production of cars will amplify their demand and hence hikes the demand for petrol and hikes its price, if adequate supplies of petrol are unaffected.
  • Sketch (1) explains the market for cars and sketch (2) for petrol. When the price of cars hikes from OP to OP1 their demand is reduced from OQ to OQ1. The demand for petrol drops as indicated by the dotted curve D1 in the sketch (2) whereby the volume demanded drops from OQ to OQ1. As a consequent, the price of petrol also drops from OP to OP1. Thus the prices of mutually demanded commodities are likely to shift in contra courses based on the grade of elasticity of demand for cars and supply of commodities.

  • If nevertheless the demand for one commodity (cars) drops from D to D1 as indicated in sketch (1), the demand for the other commodity petrol will also decline from D to D1 in Sketch (2). As a consequent the prices of both the commodities will drop from OP1 to OP. Alternatively, a hike in the demand for one commodity (cars) will hike the demand for the other product (Petrol) and hence the prices of both will hike.

  • Sketch (2) explains the case of a drop in the demand for cars from OQ to OQ1 with consequent drop in the demand for petrol from OQ to OQ1 as indicated in sketch (2). Both the sketches also indicates drop in prices of the cars and petrol from OP to OP1.

  • The extent to which these prices will vary is based on the rate of elasticity of demand for the products combined with the scale of scarcity or profusion.

  • But the question is what influences the demand and supply times of jointly demanded products; it is feasible to understand the marginal cost of production of the goods demanded mutually, however complexity to approximate their separate demand schedules. The marginal study helps to solve the said problem.

  • In order to compute the marginal utility of one commodity we take two separate combinations of the two commodities in which the volume of one commodity is used in diverse proportions while of the other is kept invariable.

For Instance

Let us assume jointly demanded goods of Pen and Ink..1 pen and 1 inkpot = $4 worth of utility, 2 pens and 1 inkpot = $6.5 worth of utility

Hence the utility of further (Marginal) unit of one pen equals $2.5. Thus the marginal utility of one pen equals $2.5. Likewise the marginal utility of ink can be computed by varying the quantity of ink and keeping the volume of pen invariable. Thus price will settle at a point where the marginal utility of a product equals its marginal cost of production and the price or demand of one product will influence that of the other in the manner.

            In a similar manner it is feasible to estimate the separate marginal product of each factor of production demanded jointly. For the building of houses, building materials like cement, bricks, steel, timber and labour are jointly demanded and the marginal output of each can be computed by varying one factor and keeping all others invariable.

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