User:JSoules/Interdependence (economics)

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Interdependence is a term in business economics which describes the mechanisms by which the prices of goods which would not naturally be in competition with each other may be related. While there is no direct market competition, the prices of both goods are variables which are partially dependent on each other.

The typical cause of interdependence is the scarcity of natural resources. For instance, both bearskin rugs and bearskin caps require the skin of a bear to make. If the price of bear skin rises, the price of both these products will rise, even though a need for one of these could not be met by the other. If the price of the bear skin inputs decreases, then the prices for both goods will fall, even though they experience no direct price competition.

Interdependence is of particular importance in the labor market, because most goods depend on some amount of labor to be produced. When unemployment is low, the labor market is tight, and firms must offer wage incentives to retain staff. Because of interdependence, all firms will simultaneously have to pay wage premiums or offer other concessions, which will drive up the price of all goods--resulting in inflation. Similarly, the prices of all labor-constrained goods should be expected to fall somewhat during a recession.