Linked Markets

1. Markets are interrelated, so a change in one market spreads to the markets connected to it.
2. Goods can be linked through demand, through supply, or through the factor markets that produce them.
3. Recognising the link lets you trace how a shock in one market ripples across the others.

Links Through Demand

1. Joint demand, or complements, describes goods used together, such as cars and petrol.
   1. A fall in the price of one raises its quantity demanded and shifts demand for its complement to the right.
2. Alternative demand, or substitutes, describes goods that replace each other, such as tea and coffee.
   1. A rise in the price of one makes the other relatively cheaper, shifting demand for the substitute to the right.

Links Through Supply

1. Joint supply describes goods produced together from the same process, such as beef and leather.
   1. Producing more of one automatically increases the supply of the other, shifting its supply curve right and lowering its price.

Derived Demand

1. Firms hire labour and buy capital not for their own sake but to make goods consumers want to buy.
2. So a rise in demand for the final good pulls up demand for the workers and materials that make it, linking a product market to its factor markets.

Tracing A Shock

1. A change in one market shifts demand or supply in each market linked to it.
2. Higher factor costs can feed back as higher production costs, shifting the product supply curve to the left.
3. Following the chain step by step shows how a single shock reaches several markets at once.

Strength Of The Link

1. The strength of the knock-on effect depends on how closely the goods are related.
2. Close substitutes or complements produce large ripples, while weak links produce only minor ones.
3. Adjustment can also lag, since hiring, training and building extra capacity all take time.

Are the links between markets always strong and predictable?

1. The links are real and often powerful: close complements, substitutes, joint supply and derived demand mean a shock in one market genuinely ripples into the markets tied to it, as the electric-car example shows.
2. But the size of the ripple varies with how closely the goods are related, measured by the cross elasticity of demand, so a weak link produces only a faint effect and the knock-on is hard to predict precisely.
3. Timing is uncertain too, since hiring, training and building capacity all involve lags, and other determinants often move at the same time, so the neat one-way chain rarely plays out in isolation.
4. On balance, inter-market links reliably show the direction of a knock-on effect but are a weaker guide to its exact size and speed; how much they matter depends on the strength of the relationship, captured by the cross elasticity, and on how many other things are changing at once.