Intermarket Relationships: How Markets Hold Hands

Hello future Economists! Welcome to one of the most interesting parts of price determination: understanding how different markets interact.

Why is this important? Think of the economy as a giant spiderweb. If you touch one strand (one market), the whole web vibrates! In this chapter, we learn that the price of Good A rarely changes in isolation. It is constantly being pulled and pushed by what’s happening with related goods—especially Good B. Mastering these relationships is key to predicting price changes.

Don't worry if this seems tricky at first; we will break down these market connections using simple, real-world examples!


Section 1: Demand Side Relationships (The Consumer’s Choice)

These relationships explain how a change in the price of one product affects the demand for another product.

1. Substitutes (Competitive Demand)

What are they?

Substitutes are goods that can be used in place of one another to satisfy the same want or need. Consumers typically view them as alternatives.

Think of it this way: If you want coffee, but the price is too high, you might happily switch to tea. Coffee and tea are substitutes.

The Impact on Price Determination:

When the price of one substitute increases, the demand for the other substitute increases (and vice versa). This is a positive relationship.

  • Step 1: The price of Coffee (PA) increases significantly.
  • Step 2: Consumers decide Coffee is too expensive and look for alternatives.
  • Step 3: They switch to Tea. The Demand for Tea (DB) shifts to the right.
  • Step 4: This increased demand for Tea causes the price of Tea (PB) to rise.

Key Takeaway: High price for one product means high demand (and potentially high price) for the substitute. This link between the markets is called Competitive Demand.

Memory Trick:
Substitute = Switch.
If the price of your preferred option makes you switch, the markets are substitutes.

2. Complements (Joint Demand)

What are they?

Complements are goods that are typically consumed together. You usually need one product to effectively use the other.

Example: Printers and Ink Cartridges, Cars and Petrol, Popcorn and Cinema Tickets.

The Impact on Price Determination:

When the price of one complement increases, the demand for the other complement decreases. This is a negative relationship.

  • Step 1: The price of Printer Ink (PA) increases dramatically.
  • Step 2: Owning a printer becomes much more expensive to run.
  • Step 3: The Demand for Printers (DB) shifts to the left (decreases), as consumers delay buying printers.
  • Step 4: This decreased demand for Printers causes the price of Printers (PB) to fall.

Key Takeaway: The goods are demanded together, hence the term Joint Demand. A high price for one item hurts the market for the item it needs.

Did you know? Sometimes complementary goods are deliberately sold cheaply (like printers) to encourage the purchase of expensive, high-profit complementary goods (like ink cartridges). This is a common pricing strategy!

3. Derived Demand

What is it?

Derived Demand means that the demand for a specific good or resource (usually a factor of production, like labour or raw materials) exists only because it is needed to produce a final, desired product.

We don't demand resources just for fun; we demand them because they help us make something else.

Analogy: A bricklayer doesn't demand bricks because they like collecting them; they demand bricks because their client demands a house. The demand for bricks is derived from the demand for houses.

The Impact on Price Determination:

Changes in the popularity or price of the final product directly and powerfully affect the price of the factor of production.

  • Scenario: Global demand for Electric Cars (the final product) suddenly skyrockets.
  • Impact 1: The demand for lithium (a key component in EV batteries) shifts sharply to the right.
  • Impact 2: Increased demand raises the price of lithium significantly.
  • Result: The price of the raw material (lithium) is determined by the demand for the final good (Electric Cars).

Quick Review: Demand for the Factor of Production is Derived from the Demand for the Final Good.

4. Composite Demand

What is it?

Composite Demand occurs when a single resource or factor of production can be used to produce multiple different final products.

Example: Milk can be used to make cheese, butter, yogurt, or just sold as drinking milk. Electricity can be used for heating, lighting, or industrial machines.

The Impact on Price Determination:

Because the supply of the resource is finite, an increase in demand from one market forces prices up for all other markets using that same resource.

  • Scenario: A sudden heatwave causes a massive increase in demand for Air Conditioning, significantly increasing the demand for electricity for cooling.
  • Impact 1: The overall demand for electricity shifts sharply to the right.
  • Impact 2: This drives up the price of electricity for everyone.
  • Impact 3: Even the users who want electricity for lighting or running factory machines (the other composite demands) face higher prices due to the heatwave.

Common Mistake to Avoid: Don't confuse Composite Demand (one resource used for many purposes) with Complementary Demand (two goods used together).


Section 2: Supply Side Relationships (The Producer’s Choice)

These relationships explain how a change in the price of one product affects the supply of another product, because they are made together.

1. Joint Supply

What is it?

Joint Supply occurs when the production of one good automatically results in the production of another good (often a by-product). The goods are produced together from a single process.

Example: When sheep are raised, the primary product is often mutton (meat), but the process also yields wool. When crude oil is refined, the main product might be petrol, but kerosene and other oils are also produced.

The Impact on Price Determination:

If the market for Product A becomes profitable, producers increase supply of A, which automatically increases the supply of Product B—even if the price of Product B hasn't changed!

  • Step 1: The price of Beef (PA) increases significantly, making production very profitable.
  • Step 2: Farmers increase the supply of cattle and slaughter more animals (SA shifts right).
  • Step 3: Since cattle produce both beef and leather (a by-product), the supply of Leather (SB) shifts right, too, regardless of the price of leather.
  • Step 4: The increased supply of leather pushes the price of leather (PB) downwards, as the market is flooded with the by-product.

Key Takeaway: Joint Supply shows an inverse relationship between the price of one product and the price of the jointly supplied product. If A's price goes up, B's supply goes up, causing B's price to fall.


Quick Review Box: Intermarket Relationships Summary

Important Relationships and Price Effects:
  • Substitutes (Competitive Demand):
    If PA rises, DB rises. (Positive link)
  • Complements (Joint Demand):
    If PA rises, DB falls. (Negative link)
  • Derived Demand:
    D of final product determines D & P of the resource/factor.
  • Composite Demand:
    Increased D in one market reduces supply and increases P for all other uses of the resource.
  • Joint Supply:
    If PA rises, SB rises (leading to fall in PB). (Inverse link in price)


That’s it for Intermarket Relationships! You’ve learned that prices are never set in a vacuum. Every decision a producer or consumer makes in one market sends ripples across the entire economy. Keep practicing these shifts, and you’ll master how prices are truly determined!