Derived demand occurs when there is a demand for a good or factor of production resulting from demand for an intermediate good or service.
Example – mobile phones and lithium batteries
The rise in demand for mobile phones and other mobile devices has led to a strong rise in demand for lithium. Lithium is used in the batteries.
Higher demand for mobile phones has caused greater demand for lithium batteries.
Derived demand – direct and indirect
The increase in demand for mobile phones will also cause derived demand for other components such as glass screens and micro-chips.
Indirectly, a rise in demand for mobile phones may cause a rise in demand for retail premises (to sell them). There will also be derived demand for energy/transport and even food services in the location where phones are produced sold.
Example of Labour as Derived Demand
In this case, greater demand for buying coffee leads to greater demand for baristas (coffee-makers)
The demand for economic tutors depends on the demand for students wishing to study economics. If students sign up for an economics course, then the college will demand tutors to be able to teach the students.
The demand for coal workers is highly dependent upon the demand for coal. As the demand for British coal fell in the 1980s, demand for coal miners declined.
Marginal Revenue Product Theory
Marginal Revenue Product Theory states that demand for labour depends upon the productivity of a worker and the marginal revenue of the goods sold. MRP = MPP * MR
- MPP = Marginal physical product
- MR = Marginal Revenue of goods sold
If demand for the good increase, the price and MR will increase leading to higher demand.
Transport as Derived Demand
Demand for transport tends to be determined by the demand for another service/activity. If people need to get to work, they will demand more bus journeys. Few people take a bus for the intrinsic pleasure of a bus journey.
Demand for car travel in the UK is closely related to economic growth. WIth more economic activity, there is greater demand for travelling by car.
Similar concept – Joint Demand / Complementary Demand
This occurs when two goods are needed together. For example,
- Mp4 downloads and an iPod player.
- A tennis ball and a tennis racket.