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Interrelationships Between Markets

Inter-relationships between markets can be modeled using both partial and general economic models. Partial models consider basic supply and demand for individual markets, while general models show how changes in one market can impact others. Markets are interrelated through various types of demand including joint demand for complementary goods, competitive demand for substitutes, derived demand where one good is needed to produce another, composite demand where a good has multiple distinct uses, and joint supply where a good is supplied for different purposes. Economic theory can be applied to supply and demand diagrams to analyze how changes in price and quantity in one market affect other related markets.

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353 views

Interrelationships Between Markets

Inter-relationships between markets can be modeled using both partial and general economic models. Partial models consider basic supply and demand for individual markets, while general models show how changes in one market can impact others. Markets are interrelated through various types of demand including joint demand for complementary goods, competitive demand for substitutes, derived demand where one good is needed to produce another, composite demand where a good has multiple distinct uses, and joint supply where a good is supplied for different purposes. Economic theory can be applied to supply and demand diagrams to analyze how changes in price and quantity in one market affect other related markets.

Uploaded by

Syed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Inter-relationships between markets

Lesson Objectives
By the end of this lesson you will:

Understand how markets are interrelated

Be able to apply the economic theory of demand and


supply analysis to the following situations

Joint demand
Competitive demand
Derived demand
Composite demand
Joint supply

Partial and general models


A partial

model is an explanation of reality


which has relatively few variables.

The basic model of price determination which


considers just two factors, supply and demand is an
example of a partial model

A general

model is more complex and can be


used to show how changes in one market can
lead to changes in other markets.

Compliments and joint demand


Joint

demand means that two goods


are demanded together, i.e. they are
complimentary goods

Examples
Ritchies

of compliments are:

tropical fish and fish tanks


DVDs and DVD players
Vodka and Red Bull

Joint demand
We

already know that a rise in the


quantity demanded of one compliment
will lead to a rise in the demand for
another.

We

can now use our knowledge of


demand and supply diagrams to see
what effect this has on the price levels.

Washing machines and automatic washing powder


Washing Machines

Automatic Washing Powder

S1

S2

D2
D

D1

Quantity

Quantity

Substitutes and competitive demand


Competitive

demand means that two


goods are substitutes for each other.
One good could be replaced by another.

Examples
Coca

of substitutes are:

Cola and Pepsi-cola


Big Macs or BK Whoppers
Gym memberships or home exercise bikes

Competitive demand
Once

again we can use our knowledge of


how supply and demand diagrams work
to see what happens if there is an
increase in the price of a substitute good.

Economic

theory tells us that a rise in the


price of good A will lead to an increase in
demand for substitute good B.

Beef and pork


Beef

Pork

S2

S1

D2
D

D1

Quantity

Quantity

Derived demand
Some

goods are demanded only because they


are needed for the production of other goods.

The

demand for such goods is said to be a


derived demand.

E.g.

the demand for sugar is in part derived


from the demand for confectionary and
chocolate.

Derived demand
Cadburys Dairy Milk Chocolate

Sugar

D2

D2

D1

D1

Quantity

Quantity

Composite demand
A dictionary

definition of composite is
something which is made up of two or more
distinct substances, e.g. fibreglass

In

this sense, composite demand means that a


good is demanded for two or more distinct
uses.

An

example of a good with composite demand


is oil which is traditionally used for chemical
production or for producing petrol.

Composite demand
As

you must make a choice between using the


oil to do one of two (or more) things, economic
theory shows us how an increase in the
demand for one of these things will effect the
other options.

For

example if the chemical industry suddenly


decides it needs more oil this will lead to a rise
in the price of oil. The result of this will be a
fall in the quantity demanded of goods with
which it is in composite demand.

Composite demand
Oil for chemicals

Oil for petrol

S2

S1

D2
D1

Quantity

Quantity

Joint supply
A good

is in joint supply with another


good when one good is supplied for two
different purposes.
Cows

are supplied for both beef and leather.

Joint supply
For

goods in joint supply, an increase in


the demand for one of the goods will
also increase the quantity supplied of the
other good.

This

is due to the increase in the price of


the first good which leads to an increase
in its supply.

Joint supply
Beef

Leather

S1

S2

D2
D1

Quantity

Quantity

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