What is Derived Demand?
Derived demand is defined as a demand which is related to a particular production factor or for the intermediate goods, which are a result of the demand often of the final or intermediate goods. To put in simple terms derived demand is the demand which is influenced on the basis of final or intermediate products.
The demand of the product depends on the demand of other products which customers are demanding. For Example – In tours and travels, certain spots suddenly become tourist places when shown in a movie or when they receive popularity. So the hotels and restaurants start becoming full. Now there would be derived demand. These hotels and restaurants will require services. Some Cab services will start which will support the internal travel of tourists. Tourist support industry will also boom. Airlines will require more manpower.
All these are indirect demands. The cab services did not receive a direct increase in demand. It increased because another industry or service increased in demand.
The derived demand can also be influenced by the additional factors which are required to complete the process of production for particular goods, which includes land, labor, capital, and raw materials.
Derived demand is entirely different from normal demand which is nothing but a supply of a certain quantity of goods and services that the customers are willing to pay for.
Derived demand is entirely dependent on the decreasing and increasing demands of the customer for a specific product or service. The more the demand of a customer in an industry increases, the more is the possibility of an increase in derived demand. Derived demand is found to have both industry and local implications.
Derived demand, as the name suggests, depends on the demand of other products, which implies that products which fall under derived demand are intermediates or used in order to make the final product or to deliver the service.
When the demand for the final product rises, the demand for the intermediate products also rises, which is why the name derived, since it is not a direct demand.
Derived Demand Curve
The construction of derived demand curve can be done under two primary assumptions, which are as follows:
- Production conditions
- Competitive markets for final goods
In case of production conditions, the factor of the demand and the supply curve for final good is taken into consideration, and at the same time, all the factors of production are kept constant and in case of competitive markets for final goods apart from that factor are the factors are considered to be constant.
The demand curve helps to answer the question of what quantity of a, is would be demanded at a rough price b, under the above-mentioned conditions.
The graph can be represented with the help of Marshall’s derived demand curve, which is Y = f(x).
Components of Derived Demand
There are various components of Derived demand. These components can also be called as the chain of derived demand. What are these components? Lets find out.
- Raw Materials – Various raw materials are essential to the calculation of derived demand. Raw materials or unprocessed materials are essential to production. Example – If automobiles are in great demand, then their tires and therefore Rubber would be in great demand too.
- Processed Materials – Processed materials are goods that have been made with raw materials. They are one step ahead of Raw materials. Continuing the above example, Rubber is the raw material and tires are components used in cars which are processed materials.
- Labor – Without Labor, production cannot work (at least until the robots take over). Thus – the level of demand for a product and the supply which can be done is dependent on the labor available as well.
Derived demand and its economic effects
The derived demand can have a ripple effect on not only the local economy but also the national economy. It has a reach beyond industries and consumers and can affect National as well as the international economy.
For example, an ethnic outfit designed by a local tailor in a particular part of a country can influence buyers to wear more jewels in order to suit the outfit. This increases the demand for jewelry, thereby making it a derived demand.
This demand can trigger a change in the economy of that particular area and as the demand increases, so does the change in the economy, thereby making a marked impression on nations economy.
A change in demand for products like crude oil, cotton or number can affect the economy on local as well as on national level as many products are procured from different countries which will, in turn, affect the economics of different countries.
This works and positive as well as in a negative way. As the demand increases, it has a positive effect on the economy, but as the demand decreases, so does the economy.
Examples of Derived Demand
1) Derived Demand in Mobile Phones
The best example is of mobile phones. As the demand for mobile phones increasing in recent decade in the derived demand for glass plastic as a minimum and other metals which are used in the building of a smartphone are on the increase.
The demand of mobile phones can be classified as the basic demand which is based on the leader of the customer, but the demand for glasses and other materials which make the smartphone is classified as derived demand because that is based on the demand of smartphone. If the demand for smartphone comes down, the derived demand for other products also goes down along with it.
2) Combination of Products and Services
Another example is of the combination of product and service, which can be stated as the demand for a good mobile network. The need for a good service provider in case of mobile phones is increasing, which is further increasing the demand for a good service provider.
This demand increases in the derived demand of the factors which is used to provide the proper service such as the network towers satellites and underground cables which are used to transmit the network. Thus as the demand for service increases the derived demand for related products sees a growth.
3) Derived Demand in Digital Payments
Digital payments are one of the most growing forms of payments in every developed country. This form of payment methods helps to keep track of spends and avoids cash transactions, which in turn helps to curb illegal money. As the need for opting of digital payments is on the rising, the derived demand for better transaction gateways and applications also increases.
Here the primary need is a gateway for payments which is safe and secure, and this increases the derived demand for better applications and gateways which provide not only safe and secure transactions but also user-friendly and, if possible, with different offers which will make the payment process not only smooth but also attractive for customers. Thus this need for more and more applications is a derived demand.
4) Holiday Packages
On an international level, as the paying capacity of people increases, people will opt for different destinations for holidays, in which case, the demand for holiday packages, airports as well as the availability of different shopping centers at tourist destination increases. Thus the primary demand affects the derived demands of different products in different sectors, creating a ripple effect. This affects local as well as the international economy of different countries and affects the derived demand in different countries as well.