In economics, most analysis uses to simplify assumables. For example, we know very few products in our economy are produced in complete competition conditions. Nevertheless, a huge portion of our text—and all other economics text—is dedicated to its discussion. There are good reasons for this practice. First, the full competition is the simplest in economic models and thus it’s a good starting point for discussion of more complex systems. Second, many markets, although not entirely competitive (i.e., firms face demand curves hoisted downwards), can be analysed like that as their behavior looks quite like complete competition. Any prediction based on this analysis will be adequately accurate to avoid the need for more complex models.
Another simplification often done in economic theory is believed that a firm or a plant produces the same product.
Various products produced by a firm can be independent of each other. This means that neither demand for one product nor cost is affected by the demand or cost of another product. In such a case, each product will be produced, as always, at the level where its marginal revenue would be equivalent to its marginal cost. The analysis can then proceed as if only one object has been produced.
However, in most cases, there are some relationships between products produced by a firm. Relationships can either be present on demand side or on cost sides. We can (at least) different interrelationships in four different:
1. Products are supplements in terms of demand. A company can produce both personal computer and software, or sell both a fast-food restaurant hamburger and soft drink.
2. Products are options in terms of demand: a company can produce different models of personal computer, or a soft drink company can bottled both cola and lemon-lemon soda.
3. Products join production. The extreme case of joint production is when the two products are produced in a fixed (or almost fixed) ratio, such as cattle production, which includes a skins and a body per steer.
4. Products compete for resources. If the company that competes for different product making resources available produce more of a product, then it has to do so at the cost of a lower production of other products. The production of various models of the same computer is an example of this. Let’s discuss each case now.