What is derived demand?

Derived demand refers to the demand for a particular product or resource that is driven by the demand for another product or resource. In other words, the demand for one item is derived from the demand for another item that is connected in the production or distribution process.

Derived demand occurs when the demand for a product or service is dependent on the demand for another product or service that is further down the supply chain.

It is typically observed in business-to-business (B2B) relationships and industrial markets.

For example, consider the demand for steel. Steel is not directly consumed by end consumers but is rather used as an input in various industries, such as construction, automotive manufacturing, and machinery production. The demand for steel is derived from the demand for these industries' final products. If the demand for automobiles increases, it will lead to an increase in the demand for steel to produce the necessary components.

Another example is the demand for labour. The demand for labour is derived from the demand for goods and services that require human resources for production. If a company experiences higher demand for its products, it may need to hire more workers to meet that demand.

In summary, derived demand refers to the indirect demand for a product or resource, which is driven by the demand for other related products or resources further down the supply chain. It highlights the interconnectedness of different stages of production and the interdependence of industries in the economy.

Derived demand can also be used to explain why the prices of some goods and services are so volatile. For example, the price of oil is often volatile because it is a derived demand. The demand for oil is derived from the demand for gasoline, diesel fuel, and other petroleum products. If the demand for these products increases, the demand for oil will also increase. This can lead to a sharp increase in the price of oil.