Define derived demand.
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Derived demand is an economic term describing the demand for a good/service resulting from the demand for an intermediate or related good/service. It is a demand for some physical or intangible thing where a market exists for both related goods and services in question. The derived demand can have a significant impact on the derived good's market price.
Derived demand is solely related to the demand placed on a good or service for its ability to acquire or produce another good or service. Additionally, derived demand can be spurred by what is required to complete the production of a particular good, including the capital, land, labor, and raw materials required. In these instances, the demand for a raw material is directly tied to the demand for products that require the raw material to be produced.
The demand that is derived from the demand for another good can be an excellent investing strategy when used to anticipate the desire for goods outside of the specific good desired. If activity in one sector increases, any sector responsible for the first sector’s success may also see gains
The principles behind derived demand work in both directions. If the demand for a good decreases, the demand for the goods required to produce the item will also decrease.
An early example of derived demand was the pick and shovel strategy, which was developed in response to correlating market forces. During the gold rush, the demand for gold prompted prospectors to search for gold. These prospectors needed picks and shovels, as well as other supplies, to mine for gold. It is arguable that, on average, those who were in the business of selling supplies to these prospectors fared better during the gold rush than the prospectors did. The demand for picks and shovels was derived, to a large degree, from the demand for gold at that time.
A more modern example exists within the computer marketplace. As more business became dependent on technology and households expand home computing capabilities, the demand for computers rises. Derived demand may be shown in the areas of computer peripherals, such as computer mice and monitors, as well as in the components required to produce the computers. The components can include items such as motherboards and video cards, as well as the materials used to produce them.
Derived demand is solely related to the demand placed on a good or service for its ability to acquire or produce another good or service. Additionally, derived demand can be spurred by what is required to complete the production of a particular good, including the capital, land, labor, and raw materials required. In these instances, the demand for a raw material is directly tied to the demand for products that require the raw material to be produced.
The demand that is derived from the demand for another good can be an excellent investing strategy when used to anticipate the desire for goods outside of the specific good desired. If activity in one sector increases, any sector responsible for the first sector’s success may also see gains
The principles behind derived demand work in both directions. If the demand for a good decreases, the demand for the goods required to produce the item will also decrease.
An early example of derived demand was the pick and shovel strategy, which was developed in response to correlating market forces. During the gold rush, the demand for gold prompted prospectors to search for gold. These prospectors needed picks and shovels, as well as other supplies, to mine for gold. It is arguable that, on average, those who were in the business of selling supplies to these prospectors fared better during the gold rush than the prospectors did. The demand for picks and shovels was derived, to a large degree, from the demand for gold at that time.
A more modern example exists within the computer marketplace. As more business became dependent on technology and households expand home computing capabilities, the demand for computers rises. Derived demand may be shown in the areas of computer peripherals, such as computer mice and monitors, as well as in the components required to produce the computers. The components can include items such as motherboards and video cards, as well as the materials used to produce them.
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Demand derived is the demand for the production factor or an intermediate good that results from demand for another final or intermediate good.
- This is analogous to the idea of mutual market or extra goods, the quantity purchased by one of them positively depends on the quantity consumed by the other.
- For example, if the demand for a resource such as wheat increases, it leads to an increase in labor demand as well as demand for other growth factors such as fertilizer.
- Alfred Marshall developed the concept of the generated demand curve for a product. It can be built under two assumptions: first, the conditions of production, the curve of demand for the final good, and the curves of supply for all other output variables are static.
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