What is Derived Demand?

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Derived demand, in economics, is the demand for a good or service that results from the demand for a different, or related, good or service. It is a demand for some physical or intangible thing where a market exists for both related goods and services in question. Derived demand can have a significant impact on the derived product's market price.

Definition

Derived demand refers to the demand for a good or service that arises from the demand for a different but related good or service. It is the demand for something tangible or intangible, where markets for related goods and services exist. Derived demand significantly impacts the market price of derived products.

Origin

The concept of derived demand originates from economic theory, dating back to the 19th century. Economists began studying the interrelationships between goods and services, particularly how changes in demand in one market affect demand in another. This concept further developed and applied in the 20th century with globalization and the complexity of supply chains.

Categories and Features

Derived demand can be categorized into direct and indirect derived demand. Direct derived demand refers to the demand for one good directly affecting the demand for another, such as the demand for cars directly impacting the demand for steel. Indirect derived demand involves multiple intermediary steps affecting the final demand for a product. The characteristics of derived demand include its dependency and chain reaction, often prominently displayed in supply chains.

Case Studies

A typical example is the automotive industry. An increase in car demand leads to increased demand for steel, rubber, and electronic components. This demand increase affects the market prices and supply chain stability of these raw materials. Another example is the technology industry, where the growth in smartphone demand leads to increased demand for semiconductor chips, affecting chip manufacturers' production plans and market strategies.

Common Issues

Investors analyzing derived demand often overlook the time lag effect of demand changes, which can lead to misjudging market trends. Additionally, the complexity and multi-layered nature of derived demand may lead to underestimating its impact range. Understanding the integrity of supply chains and market interdependencies is key to avoiding these issues.

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