Derived demand

Derived demand is a concept used in micro - and macroeconomics to describe the demand for a factor of production or a good that is derived from demand for another good. It is the demand for a product or service that is based on the demand for another related product or service. For example, the demand for tires is derived from the demand for cars. The concept of derived demand is important for management, as understanding the sources of a product's demand can help them better anticipate and meet customer needs. It also helps managers plan better for changes in the market, allowing them to maximize their production and profits.

Example of derived demand

• One example of derived demand is the demand for steel. The demand for steel is derived from the demand for cars, as steel is used to make car parts. The demand for steel is also derived from the demand for construction materials, as steel is commonly used in the construction of buildings.
• Another example of derived demand is the demand for oil. The demand for oil is derived from the demand for gasoline, as gasoline is made from oil. Additionally, the demand for oil is derived from the demand for plastic, as oil is used to make plastic products.
• A third example of derived demand is the demand for electricity. The demand for electricity is derived from the demand for appliances, as appliances need electricity to operate. Additionally, the demand for electricity is derived from the demand for lights and other forms of lighting, as electricity is necessary to power them.

When to use derived demand

Derived demand is a concept used to describe the demand for a factor of production or a good that is derived from demand for another good. It can be used in a variety of ways to help managers better understand their customer base and plan for changes in the market. Here are a few common examples of when derived demand can be used:

• To identify potential customer needs: By understanding the sources of a product's demand, managers can better anticipate and meet customer needs.
• To anticipate changes in the market: Derived demand can help managers plan for changes in the market, allowing them to maximize their production and profits.
• To make decisions about production: By understanding the derived demand for a product, managers can better determine how much to produce and when.
• To improve customer service: By understanding the derived demand for a product, managers can better determine how to meet customer needs and improve customer service.
• To better understand pricing: By understanding the derived demand for a product, managers can better determine how to price their product in order to maximize profits.

Types of derived demand

Derived demand is an important concept for understanding the sources of consumer demand for goods and services. There are several types of derived demand, which include:

• Intermediary Demand: This type of derived demand is created when a customer buys a product or service in order to produce or provide another product or service. For example, a restaurant may buy food ingredients from a supplier in order to prepare meals for customers.
• Indirect Demand: Indirect demand is derived from the demand for an unrelated product or service. For example, the demand for paint may be derived from the demand for houses.
• Joint Demand: Joint demand is when the demand for two products or services are dependent on each other. For example, the demand for both cars and car tires are dependent on each other.
• Complementary Demand: This type of derived demand is created when the demand for one good increases the demand for a related good. For example, the demand for televisions may increase the demand for television stands.

Limitations of derived demand

Derived demand is an important concept in economics, but it is not without its limitations. There are a few key limitations that should be noted when using it to understand customer needs and markets. These include:

• Difficulties in predicting demand: It can be difficult to accurately predict the demand for a related product or service, since it is based on the demand for another product or service. This can make it difficult to plan for future changes in the market.
• Limited scope: Derived demand only applies to related products and services, so it does not provide a full picture of the overall market. Other factors, such as consumer preferences and economic conditions, can also affect demand.
• Lack of accuracy: Due to the complexity of the relationship between derived demand and the actual demand for a product or service, it can be difficult to accurately predict the demand for a product or service. This can limit the usefulness of the concept in certain situations.

Overall, derived demand is a useful concept for understanding customer needs and markets, but it does have its limitations. Understanding these limitations can help managers better anticipate and meet customer needs, and maximize their production and profits.

Other approaches related to derived demand

Derived demand is an important concept to understand in order to better anticipate and meet customer needs. Other approaches related to derived demand include:

• Joint demand - This is when two products are purchased together, such as a car and tires.
• Price elasticity of demand - This is when the demand for a product is influenced by its price.
• Cross-elasticity of demand - This is when the demand for one product is influenced by changes in the price of another product.
• Demand forecasting - This is when companies use data and analysis to predict future customer demand.

In conclusion, understanding derived demand can help managers anticipate and meet customer needs, maximize production and profits, and plan for changes in the market. By understanding other approaches related to derived demand, such as joint demand, price elasticity of demand, cross-elasticity of demand, and demand forecasting, managers can better understand the sources of a product's demand and make informed decisions.

Derived demand — recommended articles

Composite demand — Independent demand — Fluctuating demand — Price sensitivity — Assumptions of economics — Causal loop diagram — Business segment — Country of origin — Demand curve shift

References

• Michael, R. T. (1973). Education and the derived demand for children. Journal of Political Economy, 81(2, Part 2), S128-S164.