Most markets are interrelated with other markets. In other words, the events in one market will have consequences in other markets.

The relationship between goods includes, complements, substitutes, derived demand, composite demand and joint supply.

Complementary goods

A complementary relationship occurs where both goods are consumed together. This is also termed Joint Demand. Examples include strawberries and cream.

Economic theory would imply that if the demand for strawberries increased, then consumers would also increase their demand for cream.

The figure illustrates the relationship. The price of Good A falls due to an increase in supply (S to S1). This results in an increases in the quantity demanded (Q to Q1). As consumers increase their demand for Good A, they will also increase their demand for the complementary good (in this case, Good B). The demand curve for Good B shifts from D1 to D.

Substitute Goods

A substitute good is where the goods can replace each other. This is also termed Competitive Demand. Examples include Coca-Cola and Pepsi-cola.

Economic theory would imply that the individual will try to maximise their utility (satisfaction) with their fixed budget. Therefore, if goods give the same satisfaction when consumed, then consumers will switch between them depending on price. In other words, if the price of Coca-Cola increases then the demand for Pepsi-cola will increase.

The figure illustrates the relationship. The price of Good A falls due to an increase in supply (S to S1). This results in an increase in the quantity demand (Q to Q1) as consumers switch towards purchasing the relatively lower priced good. As consumers switch the demand for substitute goods falls (D to D1).

Derived Demand

Derived demand is when the demand for one good is due to its being used within the production of another. For instance, the demand for steel is derived in part from the demand for cars. Therefore, if household income increased, the demand for cars would increase (demand curve shift to the right), the higher demand for cars will increase the demand for the factors of production used to make a car. This will cause the demand for steel to increase (demand curve shift to the right).