The Interrelationship Between Markets (9640 Syllabus Section 3.1.2.6)

Hello future economist! Welcome to a crucial chapter: understanding how markets talk to each other.

Up until now, we’ve often looked at the demand and supply curves for one product in isolation (like just the market for oranges). But the real world is complicated! No market exists in a vacuum. A change in the price of petrol can affect the demand for electric cars, or even the supply of plastic.

In this section, we will explore five key relationships that link markets together. Mastering these concepts is essential for complex analysis and evaluation questions.

1. The Domino Effect: How Changes in One Market Affect Others

Think of the economy as a massive spiderweb. If you touch one part of the web (one market), the vibrations (changes in price, demand, or supply) travel to related markets.

The core principle we are exploring is simple: when Demand, Supply, or Price changes in Market A, it causes a shift (not just a movement!) in the Demand or Supply curves in Market B.

Quick Review: Shifts vs. Movements

Don't worry if this seems tricky at first, just remember the basics:

  • Movement along the curve: Caused only by a change in the product's own price.
  • Shift of the curve: Caused by anything else (like a change in the price of a related good, which is what this chapter is all about!).

2. Interrelationships Based on Demand

When we talk about demand relationships, we are looking at how the consumption choices of consumers connect different products.

2.1 Joint Demand (Complementary Goods)

Key Term: Joint Demand occurs when two goods are consumed together. They are known as complements.

If the demand for Good A increases, the demand for Good B must also increase, because they are used as a pair.

Example: Cars and Petrol

  • If the price of cars falls drastically (making them cheaper), the quantity demanded for cars increases.
  • Because more cars are now in use, the Demand for Petrol shifts outwards (to the right).

Example: Smartphones and Apps or Printers and Ink Cartridges.

Memory Aid: Joint Demand = Join Together (Complements).

2.2 Competitive Demand (Substitute Goods)

Key Term: Competitive Demand occurs when two goods can be used instead of each other. They are known as substitutes.

If the demand for Good A increases, the demand for Good B must decrease, because consumers switch from B to A.

Example: Tea and Coffee

  • If the price of Coffee increases, consumers buy less coffee (movement up the curve).
  • These consumers switch to the alternative, so the Demand for Tea shifts outwards (to the right).

Did you know? The strength of competitive demand is measured by Cross Elasticity of Demand (\(XED\)). If \(XED\) is positive, the goods are substitutes.

2.3 Derived Demand

Key Term: Derived Demand is the demand for a factor of production (an input) that comes from the demand for the final good or service it produces.

The demand for the input is "derived" from the popularity of the output.

Example: Demand for Labour (Workers)

  • If the demand for haircuts increases, the demand for barbers (labour) will also increase.
  • The demand for barbers is derived from the demand for haircuts.

Example: Demand for Steel is derived from the demand for cars, bridges, and infrastructure.

Key Takeaway (Demand): Shifts in demand for related goods (substitutes or complements) are a key driver of change in any market. Derived demand shows us the link between product markets and factor markets (like the labour market).

3. Interrelationships Based on Supply and Resources

These relationships occur when production decisions in one market physically influence the quantity available in another market.

3.1 Joint Supply

Key Term: Joint Supply occurs when the production of one good automatically results in the production of another good.

These are often by-products. If the supply of the main product increases, the supply of the by-product increases too.

Example: Beef and Leather

  • If farmers increase the supply of beef (perhaps due to higher beef prices), the number of cows slaughtered increases.
  • This automatically increases the amount of available hides, so the Supply of Leather shifts outwards (to the right), lowering the price of leather.

Common Mistake to Avoid: Don't confuse Joint Supply with Joint Demand.

  • Joint Demand = Two goods consumed together (Demand shifts move together).
  • Joint Supply = Two goods produced together (Supply shifts move together).

3.2 Composite Demand

Key Term: Composite Demand occurs when a good or resource is demanded for two or more competing uses. It is about competition for a single, scarce resource.

An increase in demand for one use reduces the supply available for other uses, driving up the price of the resource overall.

Analogy: The Pizza Analogy
Imagine you have a fixed supply of cheese (the scarce resource).
Use 1: Making pizzas. Use 2: Making cheesecakes.
If the demand for pizza explodes (Use 1), all the cheese goes to the pizza market. This leaves less cheese available for cheesecakes (Use 2), forcing the price of cheesecakes to rise due to reduced *effective* supply.

Example: Land

  • Land is demanded for housing, farming, industrial sites, and roads.
  • If the demand for new housing development (Use A) increases dramatically, the amount of land available for farming (Use B) decreases.
  • This forces the price of land in the farming sector to rise, potentially reducing the supply of farmed goods.

Key Takeaway (Supply): Joint supply links co-products. Composite demand shows how competition for a single resource across different uses creates interdependence, impacting resource allocation.

4. Summary of Market Interrelationships (JCCDD)

To remember the five key interrelationships, try the mnemonic JCCDD:

Joint Demand (Complements)
Competitive Demand (Substitutes)
Composite Demand (Competing uses for a resource)
Derived Demand (Input linked to output)
Joint Supply (Co-products)

5. Applying the Concepts: A Step-by-Step Analysis

When answering exam questions about market interrelationships, use this structured approach:

Scenario: The price of crude oil increases sharply. How does this affect the market for solar panels?

Step 1: Identify the Initial Change.
The price of crude oil (the main product in the *Crude Oil Market*) rises.

Step 2: Identify the Relationship Type.
Crude oil (petrol) and solar panels (alternative energy source) are substitutes in consumption for energy users.

Step 3: Analyze the Impact on the Related Market (Solar Panels).
Since the price of crude oil has increased, consumers switch away from crude oil-based energy to the substitute, solar power.

Step 4: Conclude the Market Outcome.
The Demand for Solar Panels shifts outwards (to the right). This leads to a higher equilibrium price and a higher equilibrium quantity of solar panels sold.

Encouragement: You are now thinking like an economist! You are seeing the entire ecosystem of markets, not just individual isolated parts. Great job!