Key Diagrams - Derived Demand

Derived demand is an important concept to use when analysing and discussing inter-relationships within markets. Derived demand occurs when there is a demand for a good or factor input resulting from demand for an intermediate or final good or service.

For example, the surging demand for electric vehicles (including cars and trucks) has led to a strong rise in global demand for lithium since lithium is used in the batteries. This has caused the world price for lithium to climb.

Global prices of lithium-ion batteries have actually been falling steeply over recent years despite the increase in demand. This is the result of economies of scale in production and improved manufacturing techniques. If this trend continues, the falling costs of batteries will help bring down retail prices for electric vehicles and therefore make them more affordable.

Other useful examples of derived demand:

• The demand for labour across many industries
• Demand for warehouse space as online sales and distribution expands
• Demand for bricks is derived from spending on new construction projects.