Interrelated Markets( Complements, substitutes, Derived & Composite Demand, Joint Supply) Flashcards
(18 cards)
What are complementary goods?
Goods that are used together — called joint demand.
Example: printers and ink.
If the price of one rises, demand for the other falls (demand curve shifts left).
How do we show the effect of a price rise in one complement on the other?
Price of printers ↑ → demand for printers ↓ (movement along curve)
Demand for ink ↓ → shift of the ink demand curve to the left
What are substitute goods?
Goods that compete in use — a rise in the price of one increases demand for the other.
Example: Coke and Pepsi.
What is derived demand?
Demand for a factor/input because it’s used to produce something else.
Example: demand for steel is derived from demand for cars.
What is composite demand?
When a good is demanded for multiple uses.
Example: milk (used for drinking, cheese, butter) or oil (fuel, plastic).
What is joint supply?
When producing one good also produces another as a by-product.
Example: Beef and leather, or crude oil and gasoline.
If supply of one rises, the supply of the other may increase too.
What happens if the price of a complement falls?
Example: Razors and blades
Price of razors ↓ → extension in demand for razors (movement along the demand curve)
Demand for blades ↑ → rightward shift in the demand curve for blades
What are substitute goods (goods in competitive demand)?
Goods that replace each other — in competition
Example: Coke vs Pepsi, iPhone vs Galaxy
If the price of Coke increases, demand for Pepsi increases (demand curve for Pepsi shifts right)
How do substitutes react in interrelated markets?
Price of Good A ↑ → demand for Good B (substitute) ↑
Demand curve for substitute shifts right
If price of Good A ↓, demand for substitute shifts left
What happens if the price of Coke increases?
Demand for Coke contracts (move along demand curve)
At the same price, demand for Pepsi increases (shift of Pepsi’s demand curve to the right)
This is because Pepsi is now relatively cheaper → more attractive
Substitutes react positively to each other’s price changes
What happens if the price of Coke decreases?
Demand for Coke extends (move down the curve)
At the same price, demand for Pepsi falls (shift of Pepsi’s demand curve to the left)
Coke becomes more attractive → fewer people choose Pepsi
What is Derived Demand?
Demand for a good that comes from the demand for another good
Also called input demand
Example: If demand for cars increases, demand for aluminum (input) increases
Shown on a graph as a rightward shift in the demand curve for the input
What is an example of Derived Demand?
Labor (workers) is derived demand from goods/services
Aluminum is derived from demand for cars
Airline travel demand derives from demand for holidays
Derived demand increases when final product demand increases
What is Composite Demand?
When one good is demanded for multiple different uses
If demand for one use increases, less is available for other uses
Example: Milk used for cheese, butter, yogurt — if demand for cheese rises, less milk for other products
Leads to a fall in supply for the other uses of the input
What is a good example of Composite Demand in food markets?
Milk is used to produce both cheese and butter
If demand for cheese rises → more milk is used for cheese production
This reduces the supply of milk available for butter → supply of butter decreases
What happens in the butter market if demand for cheese increases?
Supply of butter shifts left (decreases)
Because milk is diverted to cheese production
Result: Butter prices rise, and quantity decreases
What is Joint Supply?
Joint supply occurs when the production of one good (e.g. honey) automatically increases the supply of another (e.g. beeswax), because the second good is a byproduct of producing the first.
What happens to beeswax supply when honey production increases?
As more honey is produced, more beeswax is produced as a byproduct
The supply of beeswax shifts right
This causes the price of beeswax to fall, and the quantity to increase
