The Interaction of Demand and Supply: Derived Demand
This section explores how the interaction of demand and supply extends beyond individual markets to encompass relationships between different markets, specifically focusing on the concept of derived demand.
Understanding Derived Demand
Derived demand occurs when the demand for a good or service is derived from the demand for another good or service. In simpler terms, the demand for one commodity is dependent on the demand for something else.
This is a crucial concept for understanding how economic activity flows through different sectors of an economy. It highlights the interconnectedness of markets.
Examples of Derived Demand
Steel and Car Production: The demand for steel is derived from the demand for automobiles. Car manufacturers need steel to produce cars, so their demand for steel drives the steel industry's production and demand.
Oil and Aviation: The demand for oil is derived from the demand for air travel. Airlines require oil to fuel their planes, making their demand for oil a significant factor in the oil market.
Computer Components and Consumer Electronics: The demand for components like microchips and screens is derived from the demand for computers, smartphones, and other consumer electronics.
Labour and Manufacturing: The demand for labour in the manufacturing sector is derived from the demand for manufactured goods. If demand for cars increases, the demand for labour in car factories will also increase.
Graphical Representation
Suggested diagram: A diagram showing two curves, one for the derived good (e.g., steel) and one for the underlying good (e.g., cars). The demand curve for steel is shifted based on the demand curve for cars.
Impact on Markets
Derived demand can have significant impacts on the markets involved:
Price Fluctuations: Changes in the demand for the underlying good will lead to corresponding changes in the demand and price of the derived good.
Production Levels: Shifts in derived demand will influence the production levels in the derived good's industry.
Economic Growth: Changes in derived demand can be a leading indicator of economic growth or decline. For example, an increase in car demand (and thus steel demand) can signal a period of economic expansion.
Table Summarizing Derived Demand Examples
Derived Good
Underlying Good
Example
Impact of Change in Underlying Demand
Steel
Automobiles
Demand for steel increases as car sales rise.
Steel price rises, steel production increases.
Oil
Air Travel
Demand for oil increases as air travel increases.
Oil price rises, oil production increases.
Microchips
Computers
Demand for microchips increases as computer sales increase.
Microchip price rises, microchip production increases.
Manufacturing Labour
Manufactured Goods
Demand for manufacturing labour increases as manufactured goods sales increase.
Wages in manufacturing increase, more workers are employed.
Conclusion
Understanding derived demand is essential for analyzing the interrelationships between different markets in an economy. It demonstrates how changes in the demand for one good can ripple through other industries, influencing prices, production, and overall economic activity.