Reviewed by Aug 27, 2020| Updated on
Derived demand refers to the demand for any goods or services, which is derived from any related goods, services, or intermediate goods or services. In the case of derived demand, a market can exist for both intermediate and related goods or services.
Significance of Derived Demand
Derived demand influences the market price of the derived goods. Derived demand for any goods or services also creates demand for related or incidental goods. Hence, derived demand is dependent on the demand for an intermediate good or service.
Derived demand can also be for one of the factors of production, such as raw materials, land, labour, capital. For example, the demand for raw material is directly related to the demand for the final product.
The derived demand for a product or service can be strategically used to anticipate the demand for related goods. The products or services may be from two different sectors where one sector’s output is the input for the other sector. An increase in demand or business activity in one sector would spur business activity in another sector.
A couple of examples to understand ‘Derived demand’ is the ‘pick-and-shovel-strategy’, where investment is made in the technology required to produce certain goods and services. One can assess the demand for ‘engineering services’ based on the demand for precision instruments and the business activity in the precision engineering industry.
Similarly, the demand for computer and in the area of computer peripherals, such as a mouse, keyboard, monitors, motherboards, batteries, graphic cards, and supporting materials would be based on the demand for computers and an increasing trend towards adoption of technology.
In these two examples, the demand for the accessories or supporting goods enables estimation of demand for the end product and service.
The derived demand for any product or service would differ for products and services. The demand may be based on seasonal factors, fashion trends, or regional factors. The derived demand would change on a case to case basis.