Author: Geoff Riley Last updated: Sunday 23 September, 2012
In the real world, all markets are interconnected. Supply and demand analysis can be used to explain and inter-relationships between different markets and industries.
In the first example we consider an increase in the supply of low-cost flights available from airports across the United Kingdom. The market supply of flights has shifted out to the right as lost cost airlines have entered the market and existing airlines have expanded their route network and fleet capacity. The result is a reduction in the real price of flights to short-haul destinations in Europe.
A fall in the price of airline flights increases the market demand for overseas holidays (short city breaks, package holidays for example). Assuming that British tourists can choose to holiday at home or overseas and regard the two products as substitutes, then the effect is to reduce the demand for holidays in the UK – putting downward pressure on prices, profit margins and leading to the risk of excess capacity in the UK tourist industry.
Consider how rising oil prices can feed through to related markets
The demand for a product X might be strongly linked to the demand for a related product Y. For example, the demand for steel is strongly linked to the market demand for new cars, the construction of new buildings and many manufactured products. In factor markets, the demand for labour is derived from the demand for the goods and services that we employ labour to produce.
Wood is a product where much of the market demand comes from the uses to which wood can be put. The breakdown of end use of wood in the UK is as follows:
15 million cubic metres of wood and panel products are consumed in the UK each year, enough to fill 140,000 double-decker buses. The value of wood sold at manufacturers' selling prices was £11bn in 2011.
Composite demand exists where goods or services have more than one use so that an increase in the demand for one product leads to a fall in supply of the other
The most commonly quoted example is milk which can be used for cheese, yoghurts, cream, butter and other products. Another good example is land – land can be developed in many different ways
Joint supply describes a situation where an increase or decrease in the supply of one good leads to an increase or decrease in supply of another. For example an expansion in the volume of beef production will lead to a rising market supply of beef hides. A contraction in supply of lamb will reduce the supply of wool.