Substitutes (competitive demand)
Substitutes are goods that can be used instead of each other: tea and coffee, buses and trains, two brands of soap. Because they compete for the same buyers, this is called competitive demand.
- Price of tea rises โ quantity of tea demanded falls (a movement along tea's demand curve).
- Buyers switch โ demand for coffee rises: coffee's whole demand curve shifts right, so coffee's price and quantity tend to rise.
The closer the substitute, the bigger the switch. Rule: price of A and demand for B move in the same direction.
Complements (joint demand)
Complements are goods used together: cars and petrol, printers and ink, phones and data packs, tea and sugar. Demand for them is joint demand.
- Price of petrol rises โ using a car costs more โ demand for cars falls (curve shifts left).
- A cheaper games console โ more consoles sold โ demand for games rises.
Rule: price of A and demand for B move in opposite directions. Firms use this: a cheap printer, expensive ink.
Derived demand
Derived demand is demand for a good or factor because it is needed to make something else that people want. Bricks, cement and builders are demanded because houses are demanded. Flour is wanted by bakeries because people want bread. The demand for labour is always derived from the demand for the goods and services workers produce. If demand for the final good falls, demand for its inputs falls too.
Composite demand and joint supply
Composite demand: one good is wanted for several different uses. Milk is used for drinking, cheese, butter and sweets; land can be used for farms or houses; steel for cars or buildings. If demand for one use rises, less is left for the others, so their price tends to rise.
Joint supply: producing one good automatically produces another (by-products). Beef and leather; petrol, diesel and kerosene from crude oil; wheat grain and straw. If more beef is produced, more leather is supplied too, so leather's supply curve shifts right and its price tends to fall.
Knock-on effects between markets
Because of these links, one shock spreads like ripples. Example: a frost destroys much of the coffee crop โ supply of coffee falls โ coffee price rises โ demand for tea (substitute) rises โ tea price rises โ demand for things used with coffee (coffee filters, some milk and sugar) falls. To answer exam questions: (1) name the link (substitute, complement, derived, composite, joint supply), (2) say which curve shifts and which way, (3) state the effect on price and quantity in the second market.
Try it
Look at your kitchen. Find one pair of substitutes (for example tea and coffee) and one pair of complements (for example tea and sugar). If the price of tea doubled, what would happen to how much coffee and sugar your family buys? Write your prediction, then check with the slider in the last 3D step.
Key formulas and definitions
- Substitutes: price of A โ โ demand for B โ (same direction)
- Complements: price of A โ โ demand for B โ (opposite direction)
- Derived demand: demand for final good โ โ demand for inputs (incl. labour) โ
- Composite demand: more of a good for use 1 โ less for use 2 โ price โ
- Joint supply: output of A โ โ supply of by-product B โ โ price of B โ
Worked examples
1. The price of train tickets between two cities rises sharply. What happens in the market for bus tickets on the same route?
Trains and buses are substitutes. Some travellers switch to buses, so demand for bus tickets rises (curve shifts right); bus fares and the number of bus trips tend to rise.
2. Smartphones become much cheaper. What happens to demand for phone cases?
Phones and cases are complements. Lower phone prices mean more phones sold, so demand for cases rises (shifts right) and their sales rise.
3. Fewer new houses are built because of high interest rates. Explain the effect on bricklayers.
Demand for bricklayers is derived from demand for houses. Fewer houses โ less need for bricklayers โ demand for their labour falls โ lower wages or fewer jobs.
4. Demand for beef falls as people eat less meat. Explain the effect on the price of leather.
Beef and leather are in joint supply. Fewer cattle are slaughtered, so less leather is supplied. Leather's supply curve shifts left and its price tends to rise.
5. More milk is used to make cheese for export. What happens to the price of butter?
Milk has composite demand. More milk goes to cheese, leaving less for butter, so the supply of butter falls and its price tends to rise.
Common mistakes
- Saying the demand curve for tea shifts when the price of tea changes. A change in a good's own price is a movement along its curve; it is the OTHER good's curve that shifts.
- Mixing up the direction: substitutes move the same way (price of A up, demand for B up), complements move opposite ways.
- Calling joint supply 'joint demand'. Joint demand = used together (complements); joint supply = produced together (by-products).
- Forgetting that labour demand is derived: wages in an industry depend on demand for its product.