Definition
Derived demand is an economic term that refers to the demand for a good or service that arises indirectly from the demand for another good or service. It is the demand driven by the demand for a product for which it is an input or a component. Essentially, if there is demand for a product, then there is a derived demand for the goods and services required to produce that product.
Phonetic
The phonetic pronunciation of the keyword “Derived Demand” is: /dih-rived dih-mand/
Key Takeaways
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- Derived Demand is a term used in economics to describe the demand for a particular good or service resulting from the demand for a different, or related, good or service.
- It is predominantly related to the demand chain of a product, where the demand for one good directly affects the demand for another. Products that have a derived demand are often part of a larger product and are useful only when combined with other parts.
- In industries or sectors, the concept of derived demand applies because the demand for all the raw materials is directly tied to the demand for the final product. For example, if the demand for vehicles increases, this will subsequently increase the demand for steel, iron, rubber, glass, etc.
“`These points provide a general understanding of derived demand, its implications and its role in various industries.
Importance
Derived demand is a crucial concept in business and finance because it highlights the interconnected nature of markets, emphasizing that the demand for a particular product or service originates from the demand for another final product or service. This concept is instrumental in sectors like manufacturing, where the demand for raw materials is driven by the demand for the final products they are used to create. It helps businesses in forecasting and understanding the market trends, planning their supply chains, managing inventories, setting prices, and developing strategic plans. Understanding derived demand can also predict industry downturns or growth, informing businesses when to scale production up or down.
Explanation
Derived demand refers to the demand for a good or service that arises not from direct consumption, but based on its use in the production of another good or service. In other words, the demand for one item occurs because of the demand for another. This concept is essential in business and economic projections, as it helps companies and economies anticipate trends and plan for changes in the marketplace.The purpose of understanding derived demand is to adequately plan for future production levels, capital investment, and resource allocation. It allows to analyze chain reactions in market behavior – for instance, when there is a demand for a particular product, there will be a subsequent derived demand for the raw materials used in its production. Therefore, industries that produce these materials may see increased sales as a response to trends in other sectors. Moreover, derived demand can also include the demand for labor essential to the production process. So, changes in the demand for a product can lead to employment changes in connected industries.
Examples
1. Demand for Raw Materials in Manufacturing: One of the most common examples of derived demand can be seen in the industrial and manufacturing sectors. For instance, the demand for lumber is derived from the demand for furniture or construction. If more people are buying new homes or renovating their existing ones, this increases the demand for construction services and, subsequently, the raw materials needed for those services, such as lumber. 2. Demand for IT Professionals: The emergence of new technologies and digitization of businesses has caused a surge in demand for IT professionals. As more companies require advanced IT infrastructure to remain competitive, the demand for IT experts who can implement and maintain these systems increases. The demand for IT professionals is thus derived from the broader demand for digital transformation in businesses.3. Demand for Transportation Services: The demand for transportation and logistics is often derived from the broader need to move goods and products from one place to another to meet consumer demand. For example, if there is a high demand for a certain product—say, a new smartphone—this leads to a derived demand for transportation services to deliver these products to retailers.
Frequently Asked Questions(FAQ)
What is Derived Demand in the context of finance and business?
Derived demand refers to the demand for a good or service that occurs as a result of demand for another good or service. It is the demand for some physical or intangible thing where a market exists for both related goods and services in question.
Can you give an example of Derived Demand?
Sure. For instance, the demand for coal by a factory is derived from the demands of consumers for products that are manufactured using that coal.
What part does Derived Demand play in the economy?
Derived demand plays a significant role in economic forecasting and planning. By understanding how demand for one product or service impacts the demand for related goods or services, businesses and governments can make more effective decisions about resource allocation, product development, and economic policy.
What is the relationship between Derived Demand and Indirect Demand?
Derived demand and indirect demand are related concepts. The difference is merely its application; derived demand usually applies to the relationship between goods and services, while indirect demand applies more broadly to any scenario where demand is spurred by some other demand factor.
How can understanding Derived Demand benefit a business?
A business can use the concept of derived demand to predict the sales of its own goods or services. If a business knows that its product is used as a component in another company’s product, and that company’s product is in high demand, then the business can expect a rise in the demand for its own product.
Can Derived Demand lead to a fall in demand for a product?
Yes, the concept of derived demand works both ways. If there’s a drop in demand for a finished product, there may be a consequent drop in demand for the raw materials or components used to make that product.
Is the idea of Derived Demand applicable to all industries?
Yes, the idea of derived demand can be applied across all industries, whether goods or services, provided there are identifiable relationships between different products or services.
Related Finance Terms
- Input Demand
- Production Function
- Complementary Good
- Substitute Good
- Elasticity of Derived Demand
