Derived Demand
Derived demand refers to the demand for a good or service that is influenced by the demand for another good or service. In other words, the demand for one good or service affects the demand for the other good or service.
Example:
- The demand for gasoline is derived demand because it is influenced by the demand for cars. If there is a high demand for cars, there will also be a high demand for gasoline.
- The demand for electricity is derived demand because it is influenced by the demand for appliances. If there is a high demand for appliances, there will also be a high demand for electricity.
Reasons for Derived Demand:
- Complementary goods: Goods that are complementary to each other have derived demand. For example, the demand for bread increases with the demand for butter.
- Substitute goods: Goods that are substitutes for each other have derived demand. For example, the demand for coffee decreases with the demand for tea.
- Joint products: Goods that are produced together have derived demand. For example, the demand for tires increases with the demand for cars.
Mathematical Representation:
The demand for a derived good or service (Qd) can be mathematically represented as:
Qd = f(Qs)
where:
- Qd is the quantity demanded of the derived good or service
- Qs is the quantity demanded of the other good or service
- f is a function that describes the relationship between Qd and Qs
Key Takeaways:
- Derived demand is when the demand for one good or service is influenced by the demand for another good or service.
- Goods that are complementary, substitute, or joint products have derived demand.
- The demand for a derived good or service is influenced by the demand for the other good or service.
FAQs
What is meant by derived (or derivative) demand?
Derived demand refers to the demand for a good or service that results from the demand for another related good or service. It exists because the demand for one product creates demand for another input required to produce it.
What is an example of derived demand?
A common example of derived demand is the demand for steel in the automotive industry. The demand for cars generates demand for steel, which is needed to manufacture car parts.
What is the difference between direct demand and derived demand?
Direct demand is the demand for a product intended for direct consumption by consumers, such as food or clothing. Derived demand, on the other hand, is based on the need for a product to produce another good, like machinery for manufacturing.
What is the relationship between joint demand and derived demand?
Joint demand occurs when two products are used together, like printers and ink cartridges. Derived demand arises when the need for one good drives the need for another, as in the demand for labor to produce a product that consumers want.
Can you give a real-world example of derived demand?
The demand for construction workers is derived from the demand for new buildings and infrastructure projects. When the construction industry is booming, the demand for workers and building materials increases.
