Relationships Between Markets
Why Markets Are Linked
No market exists in isolation. When the price of petrol rises, demand for electric cars tends to increase. When the price of coffee falls, demand for coffee machines may rise. When farmers grow more wheat, the supply of straw — a by-product — also rises. These links between markets are called intermarket relationships, and understanding them is essential for predicting how prices and quantities adjust across the economy.
Substitute Goods
Substitute goods are goods that compete with each other. Butter and margarine are substitutes — if the price of butter rises sharply, consumers switch to margarine, so the demand for margarine increases. On a demand curve, this looks like a rightward shift in the demand for margarine: at every price, more margarine is now demanded. The equilibrium price of margarine rises and more is sold.
You can see this in the UK streaming market. When one major streaming service raises its monthly subscription price, consumers shop around and sign up for rival services instead. The demand curve for the rival shifts to the right — more subscribers at every price — pushing that rival’s equilibrium price up and its quantity of subscribers higher.
For substitute goods: if the price of Good A rises, demand for substitute Good B shifts RIGHT — raising the equilibrium price and quantity of B. The two markets move in the SAME direction for price.
Complementary Goods
Complementary goods are goods consumed jointly. Printers and printer ink are complements — you can’t use one without the other. If the price of printers falls dramatically, more printers are sold, and so demand for printer ink rises too. The demand curve for printer ink shifts to the right, raising the equilibrium price and quantity of ink.
Think about petrol and cars. If petrol prices rise sharply and stay high, the cost of running a car goes up. Consumers may delay buying new cars or switch to smaller, more fuel-efficient models. Demand for large petrol-engine cars shifts left — lower price and fewer sold. The two goods are complements, so their markets move in OPPOSITE directions: petrol up, car demand down.
For complementary goods: if the price of Good A rises, demand for complement Good B shifts LEFT — reducing the equilibrium price and quantity of B. The two markets move in OPPOSITE directions for quantity sold.
Students often confuse substitutes and complements. The test is simple: can you use one instead of the other (substitute), or do you need both together (complement)?
For substitutes, a price rise in one good INCREASES demand for the other — the demand curves move in the same direction. For complements, a price rise in one good DECREASES demand for the other — the demand curves move in opposite directions. In both cases, the mechanism is a shift in the demand curve, not a movement along it; the consumers’ preferences or the conditions of demand have changed.
Derived Demand
Derived demand occurs when the demand for one good comes from the demand for something else. Steel is demanded not because consumers enjoy steel for its own sake, but because firms need it to build cars, bridges and appliances. If the demand for new cars rises — say, because consumer confidence improves — car manufacturers need more steel and the demand for steel rises too. The demand curve for steel shifts to the right, raising steel prices and output.
Derived demand is also central to the labour market. A building company hires bricklayers not for their own sake but to build houses. If house prices rise and the property market booms, more houses are commissioned, demand for bricklayers rises, and wages in the construction sector are pushed up. The demand for labour is always a derived demand — it flows from the demand for the final product or service.
Composite Demand
Composite demand arises when a good is demanded for more than one purpose. Milk is a classic example: it is demanded for drinking, for making cheese, for making butter and for producing yoghurt. If demand for cheese rises sharply — perhaps because a health trend promotes high-protein diets — more milk is diverted to cheese production. Less milk is available for other uses, so the price of drinking milk and butter rises too. A single resource being pulled in different directions creates competition between those uses.
Land illustrates composite demand clearly. Farmland is demanded for growing crops, for building houses and for renewable energy projects such as solar farms. When house-building programmes expand, more land is bid away from agriculture. This reduces the supply of land for farming, pushing up the cost of growing food and ultimately raising food prices.
Joint supply (also called joint production) occurs when producing one good necessarily produces another as a by-product. Beef and leather are the classic example: both come from cattle. If the demand for beef rises, farmers rear more cattle, and the supply of leather increases automatically. On a supply-and-demand diagram, the supply of leather shifts to the right, reducing the equilibrium price of leather and increasing the quantity sold.
The North Sea oil industry provides a further example: crude oil extraction yields natural gas as a by-product. When oil production increases, the supply of natural gas rises too, even if the demand for gas has not changed. This can depress gas prices and affect the profitability of gas producers.
Competitive supply occurs when two goods compete for the same limited resources. A farmer with a fixed area of land must choose between growing wheat or oilseed rape. If the price of wheat rises, it becomes more profitable to grow wheat. The farmer switches land from oilseed rape to wheat, so the supply of oilseed rape falls — its supply curve shifts left and its price rises. The two markets move in opposite directions for quantity supplied.
How a Change in One Market Ripples Through Others
Real-world economic events rarely stay confined to a single market. Consider what happened when global semiconductor shortages emerged after 2020. Semiconductors are in composite demand — they are used in cars, laptops, fridges, smartphones and medical equipment. When supply fell sharply, prices rose across all these markets. Car manufacturers were forced to pause production lines because they could not obtain the chips they needed (derived demand at work: fewer chips → fewer cars). Meanwhile, rival producers of less chip-intensive goods gained a competitive edge as consumers switched to alternatives (substitute goods at work).
Tracing these chains is exactly what the question is asking for: identify the initial change, state how it affects the demand or supply curve in the first market, then follow the ripple into linked markets, naming the relationship type (substitute, complement, joint supply, competitive supply or derived demand) at each step.