Intermarket relationships
AQA also says:
Spec content: Complements and substitutes; How changes in a particular market are likely to affect other markets.
Students should be able to understand: the meaning of complementary and substitute goods; the impact of changes in demand, supply and price in one market on other related markets.
Substitutes and Complements
Markets do not operate in isolation. Changes in one market regularly affect others — particularly where goods are related as substitutes or complements.
Substitute Goods
Two goods are substitutes if they can be used in place of each other — one can be consumed instead of the other. They compete for the same consumer need or want.
- Examples: butter and margarine; tea and coffee; bus travel and train travel; Pepsi and Coca-Cola.
- Key relationship: if the price of Good A rises, demand for substitute Good B increases (its demand curve shifts right).
Complementary Goods
Two goods are complements if they tend to be consumed together — using one increases the desire for the other.
- Examples: cars and petrol; printers and ink cartridges; smartphones and mobile data; bread and butter.
- Key relationship: if the price of Good A rises (reducing quantity demanded of A), demand for complement Good B also falls (its demand curve shifts left).
How Changes in One Market Ripple Into Others
Price changes in one market can have significant knock-on effects across the economy:
| Market change | Effect on related markets |
|---|---|
| Petrol price rises | Demand for cars falls (complement); demand for public transport rises (substitute for car travel) |
| Steel prices rise (production input) | Supply of cars, appliances, and construction decreases — costs rise across multiple downstream markets |
| Coffee prices rise | Demand for tea increases (substitute); demand for coffee cups and coffee shops falls (complements) |
| Smartphone sales boom | Demand for mobile data, apps, and phone cases rises (complements) |
This interdependence means that a shock in one market — a crop failure, a technology breakthrough, or a change in consumer tastes — can propagate through an economy, affecting prices and quantities in multiple related markets.
Key Takeaways
- Substitutes: goods that can replace each other. If price of A rises → demand for substitute B rises.
- Complements: goods consumed together. If price of A rises → demand for complement B falls.
- Changes in one market ripple into related markets through both demand effects (substitutes, complements) and supply effects (input cost changes).