A change in one market often moves a curve in another. The two diagrams show market A, where the change starts, and market B, which is linked to it. Choose the link in the title bar. These are the four relationships the Cambridge AS Level syllabus names:
- Alternative (competitive) demand: substitutes (tea and coffee). A rise in the cost of coffee shifts its supply left, so its price rises. Buyers switch to tea, so the demand for tea shifts right: its price and quantity rise.
- Joint demand: complements (cars and petrol). A rise in car production costs raises the price of cars, and fewer are bought. Less petrol is needed, so the demand for petrol shifts left: its price and quantity fall.
- Derived demand (cars and steel). Steel is wanted to make cars, not for itself. A rise in the demand for cars means more cars are made, so the demand for steel shifts right. The demand for labour and other factors of production is derived demand in the same way.
- Joint supply (lamb and wool; beef and leather). Producing one good gives you the other too, often as a by-product. A rise in the demand for lamb means more sheep are raised, so the supply of wool shifts right: its price falls and its quantity rises.
Using it. The slider is the shock in market A, in dollars per unit:
- for substitutes and complements, a change in A's production costs (supply moves up or down);
- for derived demand and joint supply, a change in the demand for A.
The buttons run an example: market A's curve moves first, then market B's follows. The old curves stay dashed, e0 is the old equilibrium and e1 the new.
How big the knock-on shift is. One simple rule holds throughout: market B's curve moves sideways by the change in A's quantity, unit for unit (k = 1). For example, each car uses one unit of petrol and one unit of steel, and each lamb gives one unit of wool. For substitutes, each unit of coffee no longer bought becomes a unit of tea. How much B's price and quantity then change depends on the slopes of B's own curves.
Key relationships
- Cross elasticity of demand (XED) = % change in quantity demanded of B ÷ % change in price of A: positive for substitutes, negative for complements.
- Joint supply: the goods' quantities move together, so their prices tend to move in opposite directions after a demand change for one of them.
Common exam mistakes
- Shifting the wrong curve in market B. A change in the price of a related good shifts B's demand (substitutes, complements, derived demand); joint supply shifts B's supply.
- Drawing a movement along A's demand curve as a shift. In market A, a cost change shifts supply and the price change is a movement along demand.
- Getting complements the wrong way round: dearer cars mean less demand for petrol.
- Forgetting that in joint supply the by-product's price falls when more of it is supplied.
Objective: Cambridge International AS Level Economics (9708): the interaction of demand and supply in related markets: joint demand, alternative demand, derived demand and joint supply.
Where this fits
- AP: AP Microeconomics Goes beyond AP Microeconomics: Joint supply isn't in AP Microeconomics.
- AQA: AQA A Level Economics (7136)
- Cambridge: Cambridge IGCSE Economics (0455); Cambridge A Level Economics (9708); Cambridge AS Level Economics (9708) Goes beyond Cambridge IGCSE Economics (0455): Derived demand and joint supply aren't in 0455.
- IB: IB Economics HL; IB Economics SL Goes beyond IB Economics HL: Joint supply and derived demand (as a market link) aren't in the IB guide.
Goes beyond IB Economics SL: Joint supply and derived demand (as a market link) aren't in the IB guide.
- Pearson Edexcel International: Edexcel International GCSE Economics (4EC1); Edexcel International A Level Economics Goes beyond Edexcel International GCSE Economics (4EC1): Derived demand and joint supply aren't in 4EC1.
Goes beyond Edexcel International A Level Economics: Joint supply isn't in IAL Economics.
- USDP: USDP Economics Goes beyond USDP Economics: Derived demand and joint supply go beyond a typical high-school course.
