A derived demand is the demand for an input used in producing a final good or service because the demand for the final good or service determines the derived demand.
Factors of production are the resources used in the ongoing production of goods or services. These include labor, capital, land, and entrepreneurial vision. The demand for factors of production is derived, meaning it is directly related to the demand for the final products they help to create. For instance, if the demand for automobiles increases, companies will require more workers, leading to an increase in the demand for labor. Thus, the demand for labor is “derived” from the demand for cars.
Why is the demand for all items sold in the factor market considered derived? The factor market—sometimes referred to as the input market—is where businesses purchase the items needed to produce the goods or services they sell. Ultimately, the demand for the final product determines how much a business is willing to produce. Since the factor market supplies the resources necessary for producing the final product, the demand for each factor is “derived” from the demand for this final product.
Hurricane Katrina caused over $81 billion in damage to the Gulf Coast in August 2005. This resulted in an enormous demand for new homes and repaired infrastructure. The demand for construction workers, lumber, and other natural resources necessary for building homes and infrastructure skyrocketed. In this case, the demand was for new homes, buildings, and infrastructure, while the derived demand was for the labor and natural resources required to produce these structures.
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Factors of Production – The Required Inputs of Every Business
Capital and Consumer Goods – How They Influence Productivity
The Circular Flow Model – We Depend On Each Other
Demand – The Consumer’s Perspective
Supply and Demand – Producers and Consumers Reach Agreement
