Derived Demand

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.