Derived demand

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In economics, derived demand is demand for a factor of production or intermediate good that occurs as a result of the demand for another intermediate or final good.[1] In essence, the demand for one is dependent on that whose demand its demand is derived from. For example, if the demand for a good such as wheat increases, then this leads to an increase in the demand for labour. For another example, demand for steel leads to derived demand for steel workers, as steel workers are necessary for the production of steel. As the demand for steel increases, so does its price. The increase in price means manufacturers of steel can gain more in revenue if they produce more steel, thus leading to a higher demand for the resources involved in producing steel.[1]

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.[1]

Derived demand applies to both consumers and producers. Producers have a derived demand for employees. The employees themselves do not appear in the employer's utility function; rather, they enable employers to profit by fulfilling the demand by consumers for their product. Clearly, the demand for labour is a derived demand from the demand for goods and services.

Another example is farm production and the demand for fertilizer. The demand for farm crops leads to the demand for fertilizer with which to grow them.

This is similar to the concept of joint demand or complementary goods, the quantity consumed of one of them depending positively on the quantity of the other consumed.[1]

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