Joint Demand

Joint demand refers to a scenario where the demand for one product is directly proportional to the demand for another. Both products are interlinked. They are used in a set; some examples are bread and butter, milk and cereals, shoes, and socks. Naturally, they are also sold with each other.

These goods are called complementary goods; the demand for one product influences the demand for the other. Thus, the increase in the price of one would reduce the demand for the other. This is known as negative cross elasticity of demand.

• Joint demand is the combined demand of two or more interlinked goods. It is also referred to as complementary demand; the products that exhibit complementary demand are called complementary goods.
• The complementary demand graph depicts a relationship between the price of one product and the demand for a second product. It is a downward slope. If the price of the first product drops, then the demand for the second product rises.
• Despite the overlap in demand for two complementary goods, the products are also helpful independently. They are not entirely reliant on each other.

Joint demand is the combined demand of two or more interlinked goods. Thus, the demand for one product affects the demand for other interlinked products. It is also referred to as complementary demand; the products that exhibit joint demand are called complementary goods.

Complementary goods are used in a set, and the sale of one influences the sale of the other. Look at bread and butter, milk and cereals, shoes, and socks; they are used and sold with each other. It does not mean that these products are less useful on their own. The concept only highlights that the market demands for the two products resemble each other. There is an obvious overlap in product demands.

The application of this concept in investment decisions is interesting. Investors study different sectors and the effect of one sector on another. Then, based on complementary demand, investors predict future trends. They bet on the future growth of a product company that is likely to have exponential demand. For example, ethanol is an industrial fuel gained from sugar processing. So based on ethanol demand, investors bet on sugar company stocks.

Since the two products are closely interlinked, the increase in the price of one would reduce the demand for the other. This is known as negative cross elasticity of demand. But, again, since the products are consumed together, the fluctuation in complementary goods prices shifts the demand curve.

When the price of one complementary product decreases, it increases the demand for the other. So, for example, when Sony reduces the price of PlayStation, its sale rises. But this also triggers the sale of popular PlayStation games.

Let us look at some joint demand examples to understand the concept better.

Example #1

In 1921, Gillette reduced the price of razors—to the extent that it made no profits off razors. Naturally, the demand rose. But right under the nose of customers, Gillette maintained the price of razor blades. Due to exponential growth in razor sales, the demand for razor blades also rose. Gillette made hefty profits on their razor blades and almost none on the razors.

Between 1909 and 1924, Gillette sold a dozen blades for $1. Instead of reducing price, Gillette reduced the number of blades per pack—from 12 to 10. In a way, Gillette increased the price per blade and further increased profits.

Example #2

Similarly, cars and gasoline complement each other. Let us assume that gasoline price rises in a particular state. Consequentially, car sales plummet. So consumers started looking for other alternatives; some used public transportation, others tried walking, and a few even bought bicycles.

In contrast, if gasoline prices fall, more consumers will purchase cars, especially SUVs and sports cars.

Now, let us look at the joint demand diagram.

The graph depicts that the demand for the second product relies on the price of the first product. It is a downward slope; if the price of the first product drops, then the demand for the second product will rise.

Now let us look at joint demand vs derived demand comparison to distinguish between the two.

• When two products complete and influence each other's usage and importance, we call it complementary demand or joint demand. In contrast, derived demand is the relationship between raw materials and finished goods. Here, the raw material is dependent on the demand for finished goods.
• Complementary goods can flourish without each other. In contrast, raw materials do not have much value if the demand for finished goods falls drastically. In such scenarios, there is negligible demand for the raw material or the intermediate product.
• Bread and butter are an example of complementary demand, there is an overlap between the two, but both bread and butter will have demand without the other. In contrast, the dependence of electric vehicle batteries on demand for electric vehicles (EVs) is an example of derived demand. If EV demand collapses, no one will buy EV batteries either.

Businesses that sell complementary goods manipulate the price of one product to increase the demand for the second product.

For example, analog cameras were sold for $40; the seller made negligible profits. Consumers thought $40 was a bargain for an instant photograph. But there was a catch; the camera came with an additional film roll where the image gets printed. One roll could print 12-15 photos. One camera roll costs $20. So. after every 12-15 photos, consumers kept paying another $20. Unlike the instant camera, the business enjoyed a high profit margin with camera rolls.

Here, both the products saw an increase in demand—instant camera and camera roll. But one individual is likely to purchase only one camera. Thus, it does not make much sense to increase instant camera prices. On the other hand, the sale of camera rolls depends on the number of photographs clicked. It keeps on growing. Thus, businesses try to increase profit using a product that has a recurring demand.

This article has been a guide to what is Joint Demand & its definition. Here, we explain its diagram, marketing strategy, examples, and comparison with derived demand. You can learn more about it from the following articles -

• Demand and Supply Analysis
• Joint Supply
• Market Approach