Published On:Thursday, 8 December 2011
Posted by Muhammad Atif Saeed
Inter-relationships Between Markets
Supply and demand analysis can be used to explain and inter-relationships between different markets and industries. For example, fluctuations in supply and demand conditions in one market change the incentives and the decisions made by producers and consumers in other markets. A change in market supply and demand in two markets In the first example we consider the huge increase in the market supply of low-cost flights available from airports across the United Kingdom. The market supply of flights has shifted out to the right, probably by far more than the increase in market demand. (New lost cost airlines have entered the market and existing airlines have expanded their route network and fleet capacity). The net result is a reduction in the average real price of flights to short-haul destinations in Europe. Consider the possible effect on the UK tourist industry. Assuming other factors remain constant (for example the exchange rate and the growth of incomes in other countries whose tourists might choose the UK as a venue for a holiday). A fall in the relative 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. Example: the growth of market demand for digital cameras Global demand for digital cameras continues to be strong. Industry analysts IDC forecast that 110 million digital cameras will be shipped in 2008, but a slowdown in market demand is on the horizon. The industry is already worth $33 billion in annual sales. The Asian/Pacific region is emerging as the powerhouse for rising demand as incomes continue to rise in emerging market economies. By 2010, these two regions will account for over 40% of total global shipments of digital cameras. The major suppliers are Canon, Fuji, HP, Kodak, Konica Minolta, Nikon, Olympus, Pentax Technologies, Samsung and Sony. What are the inter-relationships between markets in this example?
Example - High gas prices cause shut-downs in UK brick production Macroeconomics and market effectsSteep rises in the price of oil and gas is causing problems for the British brick-producing industry and is likely to lead to a fall in output and loss of jobs. It is a stark example of how the changing prices of essential inputs into the production process can filter through to affect many related industries. Baggeridge Brick, the fourth-biggest brick maker in the UK has announced that it plans to shut down two of its seven factories over Christmas and extend the closedown throughout January. The business has been hit by a double-whammy. Firstly the slowdown in the housing market and a trend towards building smaller properties has prompted a decline of 200 million in the market demand for bricks. Demand has also declined because of a reduction in spending on housing repairs, maintenance and improvement. Output in the industry has fallen by around ten per cent in 2005. Secondly the rise in the market price of gas has meant that the brick-producer is now paying double for its gas compared with this time last year. Gas is a major input into production because brick manufacturing is a very energy-intensive business. Higher brick prices will cause an increase in the cost of building new properties and in renovating existing buildings. Industry analysts forecast that planned price increases by the major brick suppliers will add around £150 - £200 to the cost of each new residential property depending on its size. Because all of the brick producers in the UK have experienced much the same rise in their energy costs, they are all expected to try to pass on these costs to final customers through higher prices. This is not collusion, merely an inevitable response to an industry-wide rise in production costs. Another good example of inter-relationships is how macroeconomic developments in one country affect the prices of goods and services that we consume in our own economy. Consider the recent phenomenal growth of the Chinese economy and the impact that it has had on demand for and prices of many important internationally-traded raw materials and commodities Chinese growth drives up world commodity prices China’s explosive economic growth voracious appetite for raw materials and energy has driven up prices worldwide and created shortages. In 2005, China consumed over 50 percent of the world's cement, 40 percent of its steel and 25 percent of its aluminium. China's growing demand for oil has been one reason crude prices are so high. Talk of an economic slowdown engineered by the Chinese government is pricking up ears from Chilean copper mines to Minnesota soybean fields. China has 4,813 cement plants - more than the rest of the world combined - and they still aren't enough to supply the cement for projects such as the Three Gorges Dam or the stadiums and housing for the 2008 Beijing Olympic Games. Consider how rising oil prices can feed through to related markets:Derived demand 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. The demand for labour is derived from the final demand for the goods and services that we employ labour to produce. So when the economy is enjoying a strong upturn in aggregate demand, so too the demand for labour increases. Conversely in a recession, as real national output declines, so we see a fall in the demand for labour at each prevailing wage rate. Composite demand 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 that of milk which can be used for cheese, yoghurts, cream, butter and other products. If more milk is used for manufacturing cheese, other things remaining the same, there is less available for butter. Another good example is land – land can be developed in many different ways – for commercial property, residential properties, leisure facilities, farming, common land and so forth. Likewise oil has numerous alternative uses – for heating oil, petrol fuel, use in petrochemicals etc. Joint supply 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. Orange Juice Squeezed by Nature Britain's daily dose of Vitamin C may be about to get a lot more expensive. The price of frozen orange juice hit a 14-year high last week, pushed up by speculators betting that market supply would remain tight this year after hurricanes and dry weather had reduced growing in the world's leading orange-producing countries. "Mother Nature has certainly done a job on the Florida citrus industry," said a spokesman for Tropicana, the world's biggest orange juice seller. Florida is the world's number-two orange producer behind Brazil, where total juice production was also down last year. The price for orange juice futures - the price of frozen juice to be delivered at a date in the future - has nearly trebled since the beginning of 2005 partly because of predictions of another heavy hurricane season in Florida. Florida will produce 153 million boxes of juice this year, one-fifth less than earlier predicted. Consumption, meanwhile, is on the rise. According to the British Soft Drinks Association, Britons guzzled 1.4 billion litres of fruit juice in 2005, an increase of 6.8 per cent over the year before. Orange juice accounts for about 70 per cent of fruit juices consumed in the UK. Tropicana has already passed some of the higher cost along to customers, hiking its juice prices by 7 per cent last year. Where the cost crunch will be most acute, however, is in "ambient" juice - the cheap supermarket branded juices stored at room-temperature, said a BSDA spokesman. "The profit margins [for ambient juices] are razor thin, so any squeeze has got to happen there," he said. Sources: Adapted from the Independent, 14 May 2006 and data from EcoWin | |
Author: Geoff Riley, Eton College, September 2006 |