Derived demand

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Derived demand is a term in economics, where demand for a factor of production or intermediate good occurs as a result of the demand for another intermediate or final good. In other words, if the demand for a good such as wheat increases, then the productivity increases, which leads to an increase in labor. 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:

MRP_L=MPP_L*P

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

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 to grow crops, which is his main source of income. However, in order for these crops to grow, they need fertilizer for nourishment. Therefore, the farmers demand for fertilizer is derived from their demand to grow crops.

Demand for tickets is a derived demand for entertainment. Demand for entertainment is the demand being satisfied when a ticket is bought. Hence purchasing the ticket is purely a means to an end. 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 e.g.: increase in wages. Conversely, 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 firm's average cost curve.

This is similar to the concept of joint demand or complementary goods. One good or service is the complement of another. In other words, when you buy a car it will not work unless it has fuel (petrol/diesel etc.). As a result, if the price of fuel rises as they have been doing recently, so too does the overall cost of owning the car. Hence fuel is the complementary good of the car. Again one buying a mobile phone is likely to buy call credit for recharge Sources: Penrith High School