Derived Demand
Derived demand, in economics, is the demand for a good or service that results from the demand for a different, or related, good or service. It is a demand for some physical or intangible thing where a market exists for both related goods and services in question. Derived demand can have a significant impact on the derived product's market price.
Derived Demand
Definition
Derived demand refers to the demand for a good or service that arises from the demand for a different but related good or service. It is the demand for something tangible or intangible, where the markets for related goods and services exist. Derived demand significantly impacts the market prices of derived products.
Origin
The concept of derived demand can be traced back to 19th-century economic theories, particularly during the Industrial Revolution. As production chains became more complex, economists began to notice that the demand for certain goods and services was driven by the demand for other goods and services. For example, the development of the automobile industry led to increased demand for raw materials like steel and rubber.
Categories and Characteristics
Derived demand can be categorized into direct derived demand and indirect derived demand. Direct derived demand refers to the demand for one good or service directly causing the demand for another, such as the demand for cars directly causing the demand for steel. Indirect derived demand involves multiple intermediate steps, such as the demand for cars leading to the demand for steel, which in turn leads to the demand for iron ore.
Characteristics of derived demand include: 1. Dependency: Derived demand depends on the existence of the original demand. 2. Transmission: Changes in the original demand are transmitted through the market, affecting derived demand. 3. Complexity: The chain of derived demand can be very complex, involving multiple intermediate steps.
Specific Cases
Case 1: The demand for smartphones drives the demand for semiconductor chips. As the smartphone market grows rapidly, the demand for semiconductor chips also increases. This increased demand affects not only chip manufacturers but also upstream suppliers of silicon materials.
Case 2: The demand for electric vehicles drives the demand for lithium batteries. As the electric vehicle market expands, the demand for lithium batteries also rises significantly. This increased demand affects not only battery manufacturers but also upstream lithium mining companies.
Common Questions
1. Why does derived demand affect market prices? Derived demand affects market prices because it increases the demand for related goods or services, potentially leading to supply shortages and higher prices.
2. How can derived demand be identified? Identifying derived demand requires analyzing the market chain to understand how the demand for one good or service is transmitted to others.
