The Interrelationship Between Markets

The Interrelationship Between Markets

1. Competitive Markets

   • ~bringing buyers (demanders) and sellers (suppliers) together creates what economists refer to as a market
     • ~we can split markets up into factor markets and goods markets
       • goods (and services) markets are where consumer or capital goods are traded
       • factor markets are where the factors of production are bought and sold (e.g. raw materials such as iron ore, commodities)

2. The impacts of changes in demand and supply on associated markets

   • Joint Demand
     • Characteristics of complementary products (goods that are consumed together, e.g. bread and butter, DVD and DVD player) where a change in demand for one good causes a similar change for the other good (high cross elasticity of demand)
   • Demand for substitute goods (substitute markets)
     • SUBSTITUES= goods that can be used as alternatives for another good, for example bus and rail services or mars bars and snickers. Close substitutes ar good alternatives, whereas weak substitutes are no very good or likely alternatives, such as gas-fired power in the UK and hyrdoelectric power.
   • Composite Demand
     • COMPOSITE DEMAND= a good that is demanded for more than one purpose so that an increase in demand for one purpose reduces the available supply for the other purpose, typically leading to higher prices, e.g. milk used in butter and cheese
   • Derived Demand
     • DERIVED DEMAND= when the demand for one good or service comes from the demand for another good or service. The demand for cars stimulates the demand for steel, therefore the demand for steel is derived demand
   • Joint Supply
     • JOINT SUPPLY= when the production of one good also results in the production of another (made of the same raw material). In the refining process of crude oils, petroleum, paraffin and others are produced.
   • Any change in the conditions or determinants of supply or demand will interfere with the market equilibrium and create a temporary disequilibrium situation that may also affect other interrelated markets.
     • It is important to be able to consider effects of increases and decreases in supply and demand for the goods and associated markets

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