If more than one by-product of the production system appears to be determinant, then the following two conditions will be able to provide an unequivocal identification of which of them is the actual one. The two conditions are:
1) To be determinant, a by-product must, alone or as part of a combination of by-products, generate an economic revenue greater than the net marginal cost capable of changing the volume of production.
2) To be determinant, the product or combination of products must have a normalized market trend greater than any other joint product or combination of by-products that satisfy the first condition.
To identify the determinant product when all joint products have an alternative production path, you can follow this step-by-step procedure:
1) First of all, check if one or more of the by-products alone satisfy the first condition, that is, if they provide an economic revenue that exceeds the net marginal cost of changing the production volume.
2) Secondly, look at those by-products that alone do not satisfy the first condition and identify all combinations of by-products that do.
3) Thirdly, compare the normalized market trend of all identified by-products and combinations of by-products that satisfy the first condition. Note that the normalized market trend of a combination of by-products is equal to the normalized market trend of the by-product with the lowest normalized market trend within the combination, as the demand for this by-product puts a constraint on the ability of the combination to change its production.
4) Finally, identify the by-product or combination that has the highest market trend. If it is a single by-product with the highest market trend, then this will be the determinant product.
The other by-products (those not determinant) are called dependent by-products. It is not very common for more than one by-product to be able to provide adequate income on its own, but it is rather interesting when it happens, as the high revenues of both by-products compared to production costs could have consequences for the entire market. Joint production of this type has great potential to compete with other production systems. This situation can be illustrated with this hypothetical example: Given two by-products A and B with revenues of 100 and 50 for the quantity produced simultaneously, respectively, as determined by alternative marginal production costs. If the co-production activity has a net marginal production cost lower than 50 for the combined quantity of A+B, the by-product with the larger market trend will provide enough income on its own to cover the cost of the combined production of A+B and thus determine its production volume.
If you have come this far, you may be wondering what marginal costs and market trend normalization are. Let's try to clarify.
Marginal costs
The marginal costs of a product represent the change in total costs caused by the production of an additional unit of that product. In other words, marginal cost measures how much additional expense is associated with producing an additional unit of the product in question. If the marginal cost is lower than the selling price of the product, it may be advantageous to produce and sell more units, as each additional unit positively contributes to profit. However, if the marginal cost exceeds the selling price, it may not be economically sustainable to produce additional units.
Normalization of market trends
Market trend normalization refers to the process of adjusting or standardizing data related to market trends in order to make them comparable on a common basis. This process is often used in statistical or economic analysis to remove distorting effects or variables that could influence the data, allowing for a more accurate assessment of the true underlying trends.
Next lesson - Deepening of "Typical situation 3"
