The Interrelationship between Markets

AQAMicroeconomics1.3.6 Updated

Written by — First-Class BSc (Hons) Economics, University of Bath · 6+ years teaching A-Level Economics · Edexcel A, Edexcel B, AQA and OCR

Specification Coverage: AQA unit 1.3.6 - The interrelationship between markets. Students should understand that changes in the demand or supply of one good or service are likely to affect other markets. Students should be able to explain the implications of joint demand, competitive demand, composite demand, derived demand and joint supply.

The Interrelationship between Markets

Relationship Explanation Examples
Joint Demand When two goods are demanded/consumed together - also known as Complementary goods. Cars and Petrol
Competitive Demand When two or more goods can be used for the same purpose - also known as Substitute goods. Butter and margarine
Composite Demand When an input is demanded for multiple production purposes, but can only be used for one purpose at a time. Milk - can either be used to produce cheese or butter.
Derived Demand When the demand for a good is determined by the demand for another good. Demand for steel derived from demand for cars
Joint Supply When the production of two goods is generated from the same source or process. Beef and leather - both produced from cows

Diagram Analysis

Joint Demand

Two panels showing a rise in the price of cars contracting quantity demanded, which shifts demand for petrol, its complement, to the left
Figure 1: Joint Demand - when two goods are demanded/consumed together, a change in the price of one good will affect the demand for the other good.

In the diagram above, we can see that a rise in the price of cars (P1 to P2) has caused a fall in the demand for petrol (D1 to D2). This is because cars and petrol are complementary goods.

Competitive Demand

Two panels showing a price rise for one substitute good shifting demand for the competing good to the right
Figure 2: Competitive Demand - when two goods are demanded as alternatives, a change in the price for one good will affect the demand for the other good.

In the diagram above, we can see that a rise in the price of butter (P1 to P2) has caused a rise in the demand for margarine (D1 to D2). This is because butter and margarine are substitute goods.

Composite Demand

Two panels showing a good demanded for two uses, where more going to one use reduces the quantity available to the other
Figure 3: Composite Demand - when a good is demanded for multiple purposes, a change in the demand for one use will affect the supply for the alternative use.

In the diagram above, we can see that a rise in the demand for cheese (D1 to D2) has caused a fall in the supply of butter (S1 to S2). This is because milk is a composite good, and can only be used to produce either cheese or butter at a time.

Derived Demand

Two panels showing a fall in demand for houses shifting demand for bricklayers left, lowering the wage and employment
Figure 4: Derived Demand - when the demand for a good depends on the demand for another good, a change in the demand for the latter will affect the demand for the former.

In the diagram above, we can see that a fall in the demand for houses (D1 to D2) has caused a fall in the demand for bricklayers (D1 to D2). This is because the demand for bricklayers is derived from the demand for houses.

Joint Supply

Two panels showing higher output of one good raising the supply of its by-product and lowering that by-product's price
Figure 5: Joint Supply - when two goods are produced together, a change in the supply of one good will affect the supply of the other good.

In the diagram above, we can see that a rise in the demand for beef (D1 to D2) has caused a rise in the supply of leather (S1 to S2). This is because the rise in demand for beef causes an extension in the supply of beef. Therefore, more cows are being produced, which means that more leather is also being produced as a by-product of beef.

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