4.1.3.6 The relationships between markets – notes for AQA

Written by Tom Furber, economics tutor

Introduction

Changes in one market can affect another market.

For example, goods can be substitutes or complements.

For AQA there are five types of relationships between markets that you need to know.

Contents

Joint demand

Joint demand refers to goods that are complements. In other words, goods that are consumed together.

This means the value of their cross-price elasticity of demand (XED) is negative.

Consider the example of phones and earphones.

  • Suppose the cost of phone chips decreases.
  • This could shift the supply of phones right from S to S1. As a result, the price of phones falls from p1 to p2 and the quantity rises from q1 to q2.
  • With more phones being bought, more people may buy earphones to go with their phones.
  • So the demand for earphones shifts right from D to D1.
  • This leads to the price of earphones rising from p3 to p4 and the quantity rising from q3 to q4.

Competitive demand

Competitive demand describes two goods that are substitutes in demand.

This means the value of the cross-price elasticity of demand (XED) is positive.

For example, consider the markets for buses and trains.

  • Suppose there is a reduction in the running costs for running buses.
  • This reduces the cost of providing bus services, so supply of bus tickets shifts right. This leads to a lower price for bus tickets in equilibrium.
  • Assume bus tickets and train tickets are substitutes.
  • Then a lower price for bus tickets may lead consumers to switch away from buying train tickets and towad buying bus tickets.
  • So demand for train tickets shifts left from D to D1 in the right diagram.
  • This results in the equilibrium price for train tickets falling from p3 to p4 and the equilibrium quantity falling from q3 to q4.

Composite demand

Composite demand means a good is demanded for multiple uses.

An example is tourist accommodation and residential acommodation.

  • There have been concerns about an increase in demand for tourist accommodation, such as Airbnb properties, in places such as Barcelona and Florence. [Left diagram].
  • This may leave a reduced supply of accommodation left for residential accommodation, in other words housing for long-term residents. [Right diagram].

Derived demand

Derived demand means that demand for an input comes from demand for an output. If demand for an output rises, more inputs will be needed to produce the extra units of output.

For example, suppose the demand for cars rises, as consumer incomes increase. [We are assuming cars are a normal good for now]. This is shown by the shift right in demand from D to D1 in the left diagram.

As a result, more steel is needed to produce the extra cars. So demand for steel also shifts right from D to D1 in the right diagram.

Joint supply

Joint supply means that the same production process results in the supply of multiple goods. This can occur where the production of one good creates other goods as “by-products” during production.

An example is beef and leather.

  • Suppose there is a reduction in demand for beef, perhaps because of changing consumer attitudes about the meat industry. [Left diagram]
  • This could reduce the number of cows on farms, which could reduce the supply of leather. [Right diagram].

Exam technique and evaluation for related markets

You may see related markets appear in 9 and 15 mark questions, as well as multiple choice. Examiners know this is a difficult topic for students.

So I’d recommend revising this topic, making sure you can separate the different types of market relationships. Drawing diagrams will be key for this topic in particular.

For 25 mark questions it can also be useful, including questions on other topics. If you are writing an essay on cigarette taxes, you could consider the effect on substitutes (e-cigarettes, competitive demand) or inputs (workers via derived demand) for example.

So, if you need evaluation points for these relationships in 25 markers, here are some ideas:

  • Joint demand / competitive demand – the magnitude of the cross-price elasticity of demand (XED).
    • Are goods weak or close substitutes/complements? Example: petrol cars vs electric cars. In some areas without charging infrastructure or depending on driver preferences, they may be weak substitutes (XED positive but close to zero) rather than close substitutes (XED positive and large)
    • Alternatively, are goods really complements instead of substitutes? Salt and vegetables may be complements rather than substitutes. So subsidies for vegetables, while lowering vegetable prices, may encourage the buying of salt to go with the vegetables.
  • Derived demand – how reliant are firms on a given input?
    • For example, suppose the demand for cars rise. If firms are not reliant on workers to produce cars anyway, then demand for workers may not rise as much.

Practice question on the relationship between markets

Here is a 15 mark example question on the relationship between markets.

It features a short mini-extract, followed by a practice question, in the style of Section B 15 mark questions for Papers 1 and 2.

The UK From 2028, the Soft Drinks Industry Levy, a tax on sugary drinks, will also cover a greater selection of drinks with added sugar. These include milk-based and milk-alternative drinks with sugar concentration of 4.5g per 100ml or more.

Question: Explain how a tax on sugary drinks may influence markets apart from the market for sugary drinks itself. (15 marks)

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About the author

Tom Furber

Helping economics students online since 2015. Previously an economist, I now provide economics resources on tfurber.com and tutor A Level and undergraduate economics students. Read more about me here.