Derived Demand Definition Curve Examples How It Works

Derived Demand Definition

Knowledge of this phenomenon helps investors achieve their business goals by developing effective investment strategiesInvestment StrategiesInvestment strategies assist investors in determining where and how to invest based on their expected return, risk appetite, corpus amount, holding period, retirement age, industry of choice, and so on.read more. One such example is the pick and shovel investment strategy. This approach is termed after the California Gold Rush, which occurred in the 19th century when firms supplying picks and shovels were deemed smart businesses since the need for this equipment was spurred by the want for gold.

Key Takeaways

Derived demand for an item occurs whenever there is a rise in demand for the items related to them. The most common form is the demand for a product causing an increase in demand for its input. Knowledge in induced demand helps businesses develop investment strategies to utilize the market for input products. It can have profound effects on the economies of nations involved. The derived demand curve illustrates the shift in the demand curve and the corresponding change in the demand curve of a related or input product.

How Does Derived Demand Work?

Derived demand is natural in most markets and economies. Such demand usually does not come from consumers but other products, services, or the makers of the consumer products and services. A chain of induced demand will originate as the raw materialsRaw MaterialsRaw materials refer to unfinished substances or unrefined natural resources used to manufacture finished goods.read more get converted into the final product. It is generally associated with resources that take the form of raw materials, semi-finished products, labor, and energy. It is evident in the financial marketFinancial MarketThe term “financial market” refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market forces.read more where a derivative price relies on the underlying asset’s value.

Academics often segregate it into direct or indirect categories.

Directly derived demand: Indicates the demand for primary raw materials required to produce the final product in demand. For instance, the demand for sanitizers induces raw materials like rubbing alcohol or isopropyl alcohol.Indirectly derived demand: This one goes beyond just the raw materials. Suppose there is an increase in demand for a product. In that case, it may indirectly affect complementary factors, for instance, the need for more inventory space to store the additional output or increased energy requirement from the production facility.

Derived Demand Curve

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The phenomenon can also be illustrated and better understood through the derived demand curve. Alfred Marshall developed the concept in his book Principles of Economics. The graph explains how a shift in the demand curveDemand CurveDemand Curve is a graphical representation of the relationship between the prices of goods and demand quantity and is usually inversely proportionate. That means higher the price, lower the demand. It determines the law of demand i.e. as the price increases, demand decreases keeping all other things equal.read more towards the right due to increased demand creates an additional demand for the underlying natural resources needed to make the final product. The first part depicts the increase in demand for product A, and the other part shows the corresponding shift in the demand curve of its input, product M.

Derived Demand Examples

The examples of derived demand are observable all around us, even in typical day-to-day life. Here are a few examples for better understanding.

Electric Vehicles

Electric vehicles have increased in demand significantly in recent years. As electric car makers expand into new markets, it has ripple effects on the different economies involved. According to the International Energy Agency, electric vehicle sales will reach 23 million in 2030. With this rise in demand comes the demand for the raw materials needed to make electric vehicles and the various battery components required. Also, the indirect effect reflects in demand for certain things like premises for manufacturing facilities, energy requirements for production, and warehousing and distribution services.

The examples of critical resources whose demand is predicted to increase are Nickel, Cobalt, Iron, and Lithium. The need for these metals will positively impact economies with large amounts of these resources. For example, Chile has the largest lithium reserves in the world. These large reserves can give Chile an advantage as the demand for electric vehicles increases, so will the need for lithium.

New Homes

Another significant example is associated with the housing market. Primarily, the demand for residential land evolved from the need for new homes. However, it also increases building materials like wood, steel, glass, etc. Moreover, as the natural resources grow in demand, labor requirements to construct these homes increase, and the need for additional real estate agents to sell the homes emerges.

Derived demand, both direct and indirect, generally originating from the producer or manufacturer side, has a significant impact on the economy in many aspects. Moreover, it benefits all parties engaged by strengthening the economy and fostering mutually beneficial connections.