derived demand

(noun)

when demand for a factor of production or intermediate good occurs as a result of the demand for another intermediate or final good

Related Terms

Examples of derived demand in the following topics:

  • Deriving the Demand Curve

    • The law of demand pursues the derivation of a demand curve for a given product that benchmarks the relative prices and quantities desired.
    • The law of demand in economics pertains to the derivation and recognition of a consumer's relative desire for a product or service coupled with a willingness and ability to pay for or purchase that good.
    • The derivation of demand curves for normal goods is therefore relatively predictable in respect to the direction of the slope on a graph (see ).
    • One important consideration in demand curve derivation is the differentiation between demand curve shifts and movement along the curve itself.
    • This graph illustrates the derivation of a demand curve for these goods.

  • Introduction to Demand and Consumer Behavior

    • Demand is a model of consumer behavior.
    • In Neoclassical microeconomics, the objective of the consumer is to maximize the utility that can be derive given their preferences, income, the prices of related goods and the price of the good for which the demand function is derived.
    • An individual's demand function can be thought of as a series of equilibrium or optimal conditions that result as the price of a good changes.
    • There are two approaches that may be used to explain an individual's demand function; utility analysis and indifference analysis.

  • The Demand for Inputs

    • The demand for a factor of production is a derived demand.
    • You do not have a direct demand for an auto mechanic; rather you have a demand for an automobile that functions properly.
    • The demand for the mechanic is a derived demand.
    • You probably do not have a demand for 2X4's (they really aren't 2" by 4"), you have a demand for a house that is constructed with the lumber.
    • The demand for an input can be derived by using the production function (the MP for an input) and the price of the good.

  • Demand Schedules and Demand Curves

    • A demand curve depicts the price and quantity combinations listed in a demand schedule.
    • The curve can be derived from a demand schedule, which is essentially a table view of the price and quantity pairings that comprise the demand curve.
    • Using a demand schedule, the quantity demanded per each individual can be summed by price, resulting in an aggregate demand schedule that provides the total demanded specific to a given price level.
    • In this manner, the demand curve for all consumers together follows from the demand curve of every individual consumer.
    • It is derived from a demand schedule, which is the table view of the price and quantity pairs that comprise the demand curve.

  • Deriving the Labor Demand Curve

    • Firms will demand labor until the marginal revenue product of labor is equal to the wage rate.
    • Firms demand labor and an input to production.
    • As with other demand curves, the market demand curve for labor is the sum of all firm's individual demand curves.
    • There are three main reasons why the demand curve for labor may shift:
    • This is reflected in an outward shift of the demand for labor.

  • Demand for Public Goods

    • The aggregate demand curve for a public good is the vertical summation of individual demand curves.
    • The aggregate demand for a public good is derived differently from the aggregate demand for private goods.
    • The aggregate demand for a public good is the sum of marginal benefits to each person at each quantity of the good provided .
    • This is in contrast to the aggregate demand curve for a private good, which is the horizontal sum of the individual demand curves at each price.
    • The intersection of the aggregate demand and the marginal cost curve (MC) determines the amount of the good provided.

  • Impact of Price on Consumer Choices

    • The demand curve shows how consumer choices respond to changes in price.
    • As price goes up, the quantity that consumers demand goes down.
    • The quantity demanded may change in response to both to shifts in demand (and the creation of a new demand curve, as demonstrated in ) and movements along the established demand curve.
    • This graph demonstrates a shift in overall demand in the market, where the generation of a new parallel demand curve is required to accurately represent consumer choices.
    • Construct the demand curve using changes in consumption due to price changes

  • Introducing Aggregate Demand

    • Aggregate demand (AD) is defined as the total demand for final goods and services in a given economy at a specific time.
    • Aggregate demand (AD) is defined as the total demand for final goods and services in a given economy at a specific time.
    • It is often called the effective demand or aggregate expenditure (AE), and is the demand of all gross domestic product (GDP).
    • Consumption (C): This is the simplest and largest component of aggregate demand (usually 40-60% of all demand), and is often what is intuitively thought of as demand.
    • The aggregate demand curve is derived via the consumption, investment, government spending, and net export.

  • Reasons for and Consequences of Shifts in the Aggregate Demand Curve

    • Aggregate demand (AD) is the summation of all demand within a given economy at a given time.
    • There are four inputs to consider in calculating AD (and deriving the graphical curve which represents it): consumption (C), investment (I), government spending (G), and net exports (NX, which is exports (X) – imports (I)).
    • Aggregate Demand/Aggregate Supply Model (AD/AS):The x-axis represents the overall output, while the y-axis represents the price level.
    • The aggregate quantity demanded (Y = C + I + G + NX) is calculated at every given aggregate average price level.
    • Below are some of the driving forces that will shift aggregate demand to the right:

  • Calculating Elasticities

    • The basic formula for the price elasticity of demand (percentage change in quantity demanded divided by the percentage change in price) yields an accurate result when the changes in quantity and price are small.
    • This happens because the price elasticity of demand often varies at different points along the demand curve and because the percentage change is not symmetric.
    • If the quantity demanded decreases from 15 units to 10 units, the percentage change is -33.3%.
    • In the formula above, dQ/dP is the partial derivative of quantity with respect to price, and P and Q are price and quantity, respectively, at a given point on the demand curve.
    • To calculate the arc elasticity, you need to know two points on the demand curve.