Inter-relationship Between Markets (NCUK International Foundation PDF)

Inter-relationship between International Foundation Year (NCUK) Markets Microeconomics Learning objectives Complement Goods Complement Goods Joint demand Complements are goods which are demanded together. They are in joint demand: milk...

Inter-relationship between International Foundation Year (NCUK) Markets Microeconomics Learning objectives Complement Goods Complement Goods Joint demand Complements are goods which are demanded together. They are in joint demand: milk and cereal, holidays and sun cream. A rise in the Q demanded of one complement will lead to an increase of the demand of the other. Result: increase in demand and price of the other complement Substitute Goods Substitute Goods Competitive demand Substitutes are goods which can be replaced by another good. If two goods are substitutes for each other, they are said to be in COMPETITIVE DEMAND: beef and pork; Coca-cola and Pepsi-cola; The Guardian (newspaper) and The Independent (newspaper); Economic theory predicts that a rise in the price of one good will lead to an increase in demand and a rise in price of a substitute good. Composite Demand Derived Demand Derived Demand Derived demand Many goods are demanded only because they are needed for the production of other goods. The demand for these goods is said to be a DERIVED DEMAND. Demand for steel is derived in part from the demand for cars and ships. The demand for flour is derived in part from the demand for cakes and bread. The demand for sugar is in part derived from demand for some beverages, confectionery and chocolate. Joint supply A good is in JOINT SUPPLY with another good when one good is supplied for two different purposes. For instance, cows are supplied for both beef and leather. An oil well may give both oil and gas. Economic theory suggests that an increase in demand for one good in joint supply will lead to an increase in its price. This leads to an increase in the quantity supplied. The supply of the other good therefore increases, leading to a fall in its price. Derived Demand vs. Joint Demand Derived demand and joint demand are two types of demand that are related to other products. Derived demand is the demand for a product that arises from the demand for another product that uses it as a raw material or an intermediate good. Joint demand is the demand for products that are consumed together or complement each other. Derived demand is dependent on the final product, while joint demand is influenced by the other product. RELATED MARKETS JOINT SUPPLY produce together in Joint supply are goods which production, by-product. Economic theory predicts that an increase in the supply for one product leads to a raise in supply of the other,vice versa,ceteris paribus. If more meat is produced,the supply of leather will increase,vice versa, ceteris paribus. RELATED MARKETS COMPOSITE DEMAND (COMPETITIVE SUPPLY) Composite demand happens when goods or services have more than one use, they are inputs in different production process. increase in the Economic theory predicts that an supply for one product leads to a fall in supply of the other,vice versa,ceteris paribus. If more milk is used for manufacturing cheese, there is less available for butter,vice versa, ceteris paribus.