The interrelationship between markets

Welcome to the Web of Markets!

In our previous lessons, we looked at how demand and supply work for a single product. But in the real world, markets are rarely isolated. They are like a giant spider web—if you pull one string here, another part of the web moves over there! In this chapter, we are going to explore the interrelationship between markets. You will learn how a change in the price of beef can affect the price of shoes, or how your desire for a new smartphone creates a job for a factory worker. Don't worry if this seems a bit "tangled" at first; we will break it down piece by piece!

1. Competitive Demand (Substitutes)

Competitive demand occurs when two or more goods are substitutes for each other. This means they satisfy the same need or want. If you can’t have one, you’ll happily take the other.

Example: Think of Pepsi and Coca-Cola, or Android phones and iPhones.

How they interact:
If the price of Good A rises, consumers will switch away from it and buy Good B instead. This means:
\( \uparrow Price \ of \ Good \ A \rightarrow \uparrow Demand \ for \ Good \ B \)

Quick Review: Because these goods compete for your money, they have a positive cross elasticity of demand (XED). When one price goes up, the other's demand goes up too!

Common Mistake to Avoid: Don't confuse a shift in demand with a movement along the curve. A price change in the substitute causes the entire demand curve of the other good to shift.

2. Joint Demand (Complements)

Joint demand happens when goods are complements. These are products that are "best friends"—they are almost always bought and used together.

Example: Think of printers and ink cartridges, or gaming consoles and video games.

How they interact:
If the price of Good A (the console) goes up, fewer people buy it. Since people have fewer consoles, they also buy fewer games (Good B). This means:
\( \uparrow Price \ of \ Good \ A \rightarrow \downarrow Demand \ for \ Good \ B \)

Memory Aid: Think of the "Joint" in Joint Demand as "Joined at the hip." They go everywhere together!

Key Takeaway: Complementary goods have a negative cross elasticity of demand (XED). Their relationship is inverse.

3. Derived Demand

This is a very important concept for understanding how the economy works. Derived demand occurs when the demand for a good or service comes from (is "derived" from) the demand for another good or service.

Example: Nobody buys "bricklayer labor" just because they like watching people lay bricks. We demand bricklayers because we demand new houses. The demand for labor is derived from the demand for housing.

Step-by-Step Process:
1. Consumers want more of a final product (e.g., Electric Cars).
2. Car companies need more raw materials (e.g., Lithium for batteries).
3. Therefore, the demand for Lithium increases because of the demand for cars.

Did you know? Most factors of production (Land, Labour, and Capital) are in derived demand. Businesses only want them so they can make the things we actually want to buy!

4. Composite Demand

Composite demand happens when a single good or resource has multiple different uses. Because the supply is limited, the different uses have to compete for it.

Example: Milk. Milk can be used to make cheese, yogurt, butter, or just be sold as fresh milk.

How it affects the market:
If the demand for cheese skyrockets, producers will use more milk to make cheese. This leaves less milk available for yogurt. As a result, the supply of yogurt might drop, causing the price of yogurt to rise—even though the "yogurt market" didn't change on its own!

Encouraging Phrase: Think of this as a "tug-of-war" over a single resource. If one side pulls harder (more demand), there is less for the other side.

5. Joint Supply

Joint supply is the opposite of composite demand. It occurs when the production of one good automatically leads to the production of another good. You can't get one without the other!

Example: When a farmer raises cows for Beef, they also get Leather (the cow's hide) as a "by-product."

How they interact:
If the price of Beef goes up, farmers will raise more cows to make more profit. Because they are raising more cows, they automatically produce more Leather. This means:
\( \uparrow Price \ of \ Good \ A \rightarrow \uparrow Supply \ of \ Good \ B \)

Key Takeaway: In joint supply, an increase in the price of the main product often leads to a lower price for the by-product, because the supply of the by-product has increased!

Summary Checklist

- Competitive Demand: Pick one or the other (Substitutes). Price of A up = Demand for B up.
- Joint Demand: Buy them together (Complements). Price of A up = Demand for B down.
- Derived Demand: I want X, so I must buy Y to make X. (e.g., Steel for Cars).
- Composite Demand: One resource, many uses (e.g., Land for farming vs. housing).
- Joint Supply: Buy one production process, get two products (e.g., Lamb and Wool).

Quick Review Box

Question: If the price of jet fuel increases, what happens to the market for airline tickets?
Answer: This is an example of derived demand (in reverse). Fuel is an input for flights. Higher fuel prices increase the cost of production for airlines, shifting the supply curve of flights to the left, which usually results in higher ticket prices for consumers.