Derived Demand

Published Apr 9, 2023

Definition of Derived Demand

Derived demand refers to the demand for a good or service that arises as a result of the demand for another good or service. In other words, the demand for one product or service leads to a demand for another product, causing an indirect effect on the demand for the latter.

Example

A classic example of derived demand is the demand for tires. When the demand for cars increases, the demand for tires also increases. The reason behind this is straightforward: more cars on the road require more tires.

Similarly, consider the demand for construction workers. When construction companies are more active, there is a greater demand for workers, and the high demand for workers causes an increase in their wage rates.

In general, derived demand occurs when there is a relationship between the production or use of one good and the demand for another good (i.e., when they are complements).

Why Derived Demand Matters

Derived demand is an essential concept in economics, particularly in the field of Microeconomics. The demand for one good or service often depends greatly on demand for another good or service, which leads to various economic phenomena.

That is, derived demand can cause pricing interdependencies between different products in a market. Thus, knowledge about it plays a critical role in decision-making processes by producers, consumers, and policymakers. By analyzing the effects of this type of demand on a product or service, producers can make sound decisions regarding production levels and pricing strategies.

Finally, policymakers can also use knowledge of derived demand to make informed policy decisions and promote economic growth. Therefore, it is important to understand that the demand for a product or service does not always exist independently from other goods or services.