Lecture%2012 - Econ 208 lecture 12 page 1 Lecture 12...

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Econ 208 lecture 12 page 1 Lecture 12: Understanding Factor Markets Last point on market analysis Joint Product Pricing or pricing by-products One last point on markets. Suppose that a process generates a by-product. Classic case is meat and hides. You have to kill the cow to get the meat, but you get the hide as a by-product (also the hooves, used to make glue). How are the prices of the two joint products determined? Can we apply what we know to figure this out? The costs apply to the cows. So cows are on the horizontal axis. The vertical axis is price. It is usual to make the supply curve the supply of the primary product, in this case meat. So we have an upward supply curve for meat, which reflects the rising supply price of cattle. Each cow yields, say, 400 pounds of meat. This takes care of the units. The demand for meat is like any demand curve. Sum of individual demands. Downward sloping. The intersection determines the price of meat in 400 pound packets (one packet per cow). This determines the equilibrium number of cattle slaughtered. Similarly, the demand for hides is determined as sum of individual demand for hides. It is important that hides and meat be non-substitutable in consumption. You can’t trade one off for the other.
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Econ 208 lecture 12 page 2 The demand for slaughtered cows is the sum of the demand for hides and meat. Note that we have to define units so that they are commensurable. One hide = 400 pounds of meat = 1 cow. Equilibrium slaughters is the number of cows that makes the supply price exactly equal to the sum of the two demand prices.
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