Derived Demand
Derived demand is an economic term that refers to the demand for factors of production needed to produce a final good or service. This type of demand is indirect because it stems from the ultimate demand for the finished product. When consumers demand more of a final good, producers need more resources to meet that demand, consequently increasing the demand for capital goods (like machinery) and labor (workforce) used in production.
Examples of Derived Demand
1. Automotive Industry
When there’s an increase in the demand for cars, manufacturers require more components such as tires, steel, and labor. Thus, the demand for these materials and labor resources is derived from the growing consumer demand for vehicles.
2. Construction Sector
If there is a boom in real estate, the demand for construction equipment, raw materials like cement and steel, and skilled labor (architects, engineers, and construction workers) rises. Here, the demand for these inputs is directly linked to the increased demand for housing and commercial buildings.
3. Technology Companies
As consumer demand for smartphones rises, tech companies face derived demand for microprocessors, screen components, software developers, and assembly workers. The suppliers of these components and services respond to changing needs in the smartphone market.
Frequently Asked Questions (FAQs)
What are capital goods in the context of derived demand?
Capital goods refer to the physical assets used by companies to produce goods and services. This includes machinery, buildings, vehicles, and tools. Their demand increases with the rising needs of production due to higher demand for finished goods.
How does derived demand impact employment?
Derived demand can significantly impact labor markets. As demand for finished goods increases, companies hire more workers to meet production needs, thereby boosting employment in those industries.
Can derived demand decrease?
Yes, derived demand can decrease if the demand for the final goods or services declines. For example, if people start buying fewer cars, the demand for automotive parts and labor in car factories will likely drop.
Primary Demand
This is the demand for a product or service itself, not derived from another need or requirement.
Elasticity of Demand
A measure of how much the quantity demanded of a good responds to a change in the price of that good.
Supply Chain
The entire network involved in producing and delivering a final product to the end consumer, from raw material extraction to the final sale.
Marginal Product of Labor
The additional output that results from hiring one more worker.
Online References
Suggested Books for Further Studies
- Microeconomics: Principles, Problems, and Policies by Campbell R. McConnell, Stanley L. Brue, and Sean M. Flynn
- Economics: The User’s Guide by Ha-Joon Chang
- Industrial Organization: Theory and Practice by Don E. Waldman and Elizabeth J. Jensen
Fundamentals of Derived Demand: Business Economics Basics Quiz
### What is derived demand?
- [ ] The increasing need for new technology.
- [ ] Demand generated by innovative marketing strategies.
- [x] Demand for a factor of production resulting from the demand for the final good.
- [ ] The surplus of supply in the market.
> **Explanation:** Derived demand is the demand for a factor of production or an input that arises from the demand for the final good or service.
### Which is an example of derived demand?
- [ ] The demand for a popular sports car directly increases consumer spending.
- [ ] A fashion trend that leads to a spike in garments sold at retail stores.
- [x] An increase in demand for assembly-line workers due to rising car sales.
- [ ] High potato production leading to a fall in potato prices.
> **Explanation:** The increased demand for assembly-line workers due to rising car sales is an example of derived demand.
### What increases when there is derived demand for capital goods?
- [ ] Demand for imported goods.
- [ ] The overall inflation rate.
- [ ] Primary demand for consumer goods.
- [x] Employment opportunities linked to production.
> **Explanation:** An increase in derived demand for capital goods often leads to more job opportunities in the production and manufacturing sector.
### Why is the elasticity of derived demand often critical for businesses?
- [ ] It helps managers design better products.
- [x] It informs how a change in demand for final goods affects the demand for production inputs.
- [ ] It provides insight into environmental sustainability.
- [ ] It influences global economic policies.
> **Explanation:** Understanding the elasticity of derived demand helps businesses gauge how changes in the demand for final goods will impact the demand for production inputs.
### What does derived demand typically lead to in a booming industry?
- [ ] A reduction in skilled labor positions.
- [ ] Decreased market competition.
- [x] Increased demand for production resources.
- [ ] Drops in wholesale product prices.
> **Explanation:** In a booming industry, derived demand typically leads to an increased need for resources used in production, such as labor, machinery, and raw materials.
### Can consumer behavior influence derived demand?
- [x] Yes, changes in consumer preferences can alter the demand for production inputs.
- [ ] No, it only impacts primary demand.
- [ ] It generally affects only services, not goods.
- [ ] Only technological advances impact derived demand, not consumer behavior.
> **Explanation:** Consumer behavior can significantly influence derived demand because changes in consumer preferences alter the demand for final goods, subsequently impacting the demand for production inputs.
### In which scenario would derived demand decrease?
- [ ] An increase in consumer wealth.
- [ ] A drop in the cost of raw materials.
- [ ] Technological advancements boost production.
- [x] A decline in the demand for the final product.
> **Explanation:** Derived demand would decrease in a scenario where there is a decline in the demand for the final product, as production needs would subsequently drop.
### What drives derived demand in construction?
- [ ] Weather conditions.
- [ ] Changes in tax policies.
- [ ] Improved automation techniques.
- [x] Increased demand for residential and commercial properties.
> **Explanation:** The demand for construction inputs like labor, machinery, and materials is derived primarily from the increased demand for residential and commercial properties.
### Which of the following directly reflects the effects of derived demand on labor markets?
- [x] More jobs in industry-specific manufacturing.
- [ ] Higher rates of unemployment.
- [ ] More resource allocation to R&D.
- [ ] Increased investment in foreign markets.
> **Explanation:** Derived demand often leads to more labor being hired, specifically in manufacturing or production roles that directly relate to the increased demand for final goods.
### Why do businesses closely monitor derived demand?
- [ ] To predict consumer behavior.
- [x] To adjust production capacity and resource allocation.
- [ ] To determine company marketing strategies.
- [ ] To evaluate stock prices.
> **Explanation:** Businesses monitor derived demand to better align their production capacities and resource allocations with the anticipated demand for final goods.
Thank you for learning about derived demand. Test your understanding further by revisiting these concepts in dynamic market scenarios!
