Derived demand


Derived demand

Derived demand is a term in economics, where demand for one good or service occurs as a result of demand for another. This may occur as the former is a part of production of the second. For example, demand for coal leads to derived demand for mining, as coal must be mined for coal to be consumed. As the demand for coal increases, so does its price. The increase in price leads to a higher demand for the resources involved in mining coal. And therefore:

MRPL = MPPL * P

Where MRP is the marginal revenue product of labour, MPP is the marginal physical product of labour, and P is the price of the physical product of labour.

Demand for transport is another good example of derived demand, as users of transport are very often consuming the service not because they benefit from consumption directly (except in cases such as pleasure cruises), but because they wish to partake in other consumption elsewhere.

Derived demand applies to both consumers and producers. Producers have a derived demand for employees. The employees themselves are not demanded; rather, the skills and productivity that they bring are.

Another example would be production and demand for fertilizer. Farmers need fertilizer to grow crops, which is his main source of income. Thus for his own consumption he demands fertilizer. Thus its a derived demand of fertilizer to produce crops.

Tickets are a derived demand for entertainment. Entertainment is the demand being satisfied when a ticket is bought; it is purely a means to an end. The ticket is not an end in itself. The ticket is merely a license to attend a specified event at a specified time and place. The ticket agency is merely that, an agent of the principal (the event owner) authorized to make a transaction with a prospective attendee on the behalf of the principal.

When supply for a particular good or service increases, the derived demand for factors of production needed in producing this good or service also increases. Therefore this drives up the price for the factors of production and a firm's average cost curve increases as it has incurred a variable cost eg: increase in wages. Adversely, when supply for a good or service decreases so does the derived demand for its inputs. This causes the price of factors of production to decrease, decreasing a firms average cost curve.

This is similar to the concept of joint demand.


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