Micro 6: Interrelationship Between Markets

Question 1

What is joint demand and what are some examples?

Answer 1

Demand for goods which tend to be consumed together. Demand for complementary goods. Eg. bread + butter, petrol + cars

Question 2

What is competitive demand and what are some examples?

Answer 2

Demand for goods which fulfill similar wants and needs, such that one can be consumed in the place of the other and provide similar utility. Demand for substitute goods. Eg. butter + margarine, pepsi + coke

Question 3

What is composite demand and what are some examples?

Answer 3

Demand for a good which has multiple different uses, such that, as people demand the good more for one use, less is available for other uses. Eg. oil, milk, wheat

Question 4

What is derived demand and what are some examples?

Answer 4

Demand for a good which is used to meet another demand, so when demand for one good or service increases, derived demand will increase for the goods which are used to produce it. Commodities are the most obvious example of goods that have a derived demand. Eg. grapes (wine), wheat (bread), milk (butter)

Question 5

What is joint supply and what are some examples?

Answer 5

Supply of multiple goods which tend to be produced through a single operation or process such that the goods are produced together. This may be goods where one good is a byproduct of the other good. Eg. haircuts + wigs, petrol + gas, sawdust + wood

Question 6

What are commodities and what kind of demand are they normally?

Answer 6

Derived demand. They’re goods commonly used to make other things. They’re often primary goods which means they’re taken straight from the ground and have not been manufactured. They’re often essential goods for the supply of many other goods and services. Many commodities, like gold and oil, are often traded between investors as a store of wealth rather than for personal use.

Question 7

What is PED like for most commodities?

Answer 7

Inelastic because they’re essential goods.

Question 8

Which commodities have volatile supply and what will affect supply of these goods?

Answer 8

Crops because they’re dependent on the weather.

Question 9

What is XED?

Answer 9

Cross Elasticity of Demand. It’s a measure of how responsive demand for one good is to changes in price of another good.

Question 10

What is YED?

Answer 10

Income Elasticity of Demand. A measure of how responsive demand for a good is to changes in the real income of consumers.

Question 11

What is the formula of XED?

Answer 11

% change in quantity demanded of good x /
% change in price of good y

Question 12

What can XED tell us about demand?

Answer 12

It can tell us whether demand for two goods is joint demand or competitive demand. That is whether they’re complements or substitutes. The higher the figure for XED, the stronger the relationship (the closer substitutes or complements the goods are).

Question 13

What relationship do the goods have if XED = 0?

Answer 13

Goods x and y are unrelated.

Question 14

What relationship do the goods have if XED > 0?

Answer 14

Goods x and y are substitute goods.

Question 15

What relationship do the goods have if XED < 0?

Answer 15

Goods x and y are complementary goods.

Question 16

What does a positive YED mean?

Answer 16

There is a rise in quantity demanded when there is a rise in real income.

Question 17

What does a negative YED mean?

Answer 17

A rise in real income leads to a fall in the quantity demanded for a good.

Question 18

What is a normal good?

Answer 18

A good for which demand increases as real income increases. YED is greater than 0 (positive).
This is because one would usually expect demand for a good to increase as incomes rise. The income effect means that as prices rise, quantity demanded of a good will fall as the good constitutes a greater proportion of people’s income. Likewise, as incomes rise, the price of any good will constitute a smaller proportion of people’s income, and so it’s expected more of those goods will be bought.

Question 19

What is a superior good?

Answer 19

A good for which demand increases at a greater rate than real income when income rises. YED is greater than 1.

Question 20

What is an inferior good?

Answer 20

A good for which demand decreases as incomes rise. YED is less than 0 (negative).
This is a good that is consumed less as incomes rise. They’re usually low quality, low price goods that people will not consume if they have a choice and they will choose a higher quality good when the opportunity arises. When real incomes fall, people will increase their consumption of inferior goods as they’re substitutes for more expensive goods and consumers will need to switch to the products they can afford.

Question 21

What is the mnemonic for XED?

Answer 21

Party Season Near Christmas
Positive - substitutes
Negative - complements