What is Derived Demand?
In economics, derived demand constitutes an essential concept underscoring the complex relationships between different goods and services. It refers to the demand for a specific product or service that arises as a result of the demand for another related product or service. This concept applies to both tangible and intangible entities operating within an ecosystem where markets for correlated goods and services coexist. The impact of derived demand extends beyond theoretical analysis, significantly influencing the pricing dynamics of the resultant products or services. This interconnection between heterogeneous yet interdependent factors of the economic landscape is a major point for understanding the subtle mechanisms controlling market behavior and price determination.
Derived Demand explained
The concept of derived demand in economics means that the demand for a product or service is affected not only by consumers but also by the demand for other related products, services, or the production factors of those consumer goods. This creates a chain of demand that starts from raw materials and goes through various stages until the final product is made. Resources such as raw materials, semi-finished products, labor, and energy are closely associated with derived demand. This concept also applies to the financial market, where the price of a derivative depends on the price of the underlying asset.
Scholars often classify it into two categories:
Direct-derived demand: It’s demand for the primary raw materials that are needed to produce the final product in demand. For example, if the demand for sanitizers increases, the demand for the raw materials used in the production of sanitizers, such as rubbing alcohol or isopropyl alcohol, also increases.
Indirect derived demand: If demand for a product increases, it somehow affects the demand for the complementary factors. For example, if the demand for a product increases, there might be a possibility that the demand for logistics, storage space, energy, and more labor will also increase. Indirect derived demand captures the spillover effects of changes in demand for a product on other sectors of the economy