Interrelationships between markets

■ Define joint demand, competitive demand, derived

demand, composite demand, joint supply and
competitive supply
■ Draw neat and accurate price/quantity diagrams to
illustrate the inter-relationships
■ Identify these concepts in real world examples

Reading: Cook et al 66-69

Interrelationships between markets

■ We should understand that markets do not exist on

their own. Instead they have relationships to other
markets
■ Some of these inter-relationships include:
➢ Complements / joint-demand
➢ Substitutes / competitive demand
➢ Derived demand
➢ Joint-supply
Complements / joint-demand
■ Demand for two goods is linked
■ When demanding one good, a person is likely
to demand the other as well
■ Higher Qd of one complement will increase
Qd of another and vice versa
■ Examples:
➢ PS4 and 4K TVs
➢ Nail polish and nail polish remover
Complements / joint-demand
Car market affected by an Demand for petrol as a result of
increase in average income an increase in demand for cars
P D1 D2 S P D1 D2 S

P2 P2

P1
P1

Q1 Q2 Q1 Q2
Q Q
Question 1

■ During the early 2000’s, producers of many products capable

of playing music files (e.g. MP3s) have experienced lower
production costs. It has now become common for people to use
these devices (smart-phones, laptop computers, MP3 players,
etc.) to play music. This has led to a rapid increase in the use of
websites legally providing music download services such as
iTunes.

■ Using price/quantity diagrams show the inter-relationship

between these two markets.
Substitutes / competitive demand

■ When one good can be easily replaced by another

good
■ A rise in the price of a good will increase the Qd
of its substitutes and vice versa
■ Examples:
➢ Coke and Pepsi
➢ Oranges and apples
Substitutes / competitive demand
Government introduces a Consumers respond by purchasing
tax on an imported good domestic substitutes
S2 S1
P D P D1 D2 S

P2
P2
P1
P1

Q2 Q1 Q1 Q2
Q Q
Question 2

■ A good season for growing fruit in China has led to an

excellent harvest. Subsequently local supermarkets have been
buying more domestic fruit and importing less from foreign
countries.

■ Using price/quantity diagrams show the inter-relationship

between these two markets.
Derived demand
■ When one good is demanded because it is needed
in the production of another good
■ If demand for a good increases, Qd will increase
for goods used to produce it and vice versa
■ Examples:
➢ Cocoa beans for chocolate
➢ Steel for cars
➢ Flour for bread
Derived demand
Apple need to buy more materials
Consumers increase demand for and components required for the
the iPhone as the larger screen production of iPhones such as
increases its popularity ‘front-facing camera modules
P D1 D2 S
P D1 D2 S

P2 P2
P1
P1

Q1 Q2 Q1 Q2
Q Q
Question 3

■ Over the last decade as consumers’ incomes have grown. As a

consequence, car ownership in China has increased
dramatically. This has caused an increase in the purchase of
steel by car companies.

■ Using price/quantity diagrams show the inter-relationship

between these two markets.
Joint-supply

■ When a good is supplied for two different

purposes simultaneously
■ Increased supply of the good will increase the
supply for both purposes
■ Examples:
➢ Cattle are used in the production of ‘beef’ and
‘leather’
Joint-supply
BSE (aka mad cow disease) Cattle parts used to produce other
reduces the availability of beef goods e.g. skin for leather

P S2 P S2
D D
S1 S1

P2 P2

P1 P1

Q2 Q1 Q2 Q1
Q Q
Question 4

■ When oil is extracted from the ground it is used for a range of

products. Lighter parts of the oil are used for petrol in cars and
other engines; whereas, heavier parts of the oil are used for a
range of products including asphalt (the material for making
roads). With the increase in car use around the world there has
been a significant increase in the demand for oil.

■ With the use of demand and supply diagrams illustrate and

explain how this will affect the market for asphalt.
Composite Demand
■ When a good is used in the production of two or
more goods, but can’t be used for more than one
■ Examples:
➢ Wheat can be used for ‘bread’, ‘beer’ or even
‘animal feed’
➢ If bread is produced the opportunity cost could be
beer
Composite Demand
Consumers demand more Farmers maintain larger flocks, thus
clothing produced using wool produce less lamb and mutton meat
P P S2
D1 D2 S D
S1

P2
P2
P1
P1

Q1 Q2 Q2 Q1
Q Q
Question 5
■ Until its recent decline, the Australian iron ore industry
experienced vast demand from China due to expansion of
industries such as construction over much of the past 50 years.
This means that firms output will be diverted away from the
domestic market.

■ Using price/quantity diagrams show the inter-relationship

between these two markets.
Competitive supply
■ When a resource is allocated to one use instead of
another. Supply will increase in the allocated
market, but reduce supply in other markets where
said resources could also be used.
■ Examples:
■ Land allocated for commercial use instead of for
residential construction
Competitive supply
The supply of labour in other
More computer science grad choose computer science related industries
to enter the video game industryjjjjjjjjj e.g. computer development
P S1 P S2
D D
S2 S1

P1 P2

P2 P1

Q1 Q2 Q2 Q1
Q Q
Question 6

■ During the previous Bush administration in the USA, subsidies

encouraged farmers to produce biofuels. Therefore farmland
was allocated to produce biofuels reducing farmland available
to produce grain.

■ Using price/quantity diagrams show the inter-relationship

between these two markets.