Question

Other than the demand for labor, what would be another example of a “derived demand?”

Short answer

An example of a derived demand, other than labor, is the demand for raw materials in manufacturing. This demand is derived from the demand for the final products made using these materials, such as cars, furniture, or electronic devices. As the demand for these finished products increases, so does the demand for the raw materials needed for their production.

Step-by-step solution

Identify an Example of Derived Demand

One example of a derived demand, aside from labor, is the demand for raw materials in manufacturing.

Explain the Derived Demand

The demand for raw materials, such as steel, wood, or plastic, is derived from the demand for the final products that are made using these materials - like cars, furniture, or electronic devices. As the demand for these finished products increases, so does the demand for the raw materials needed for their production. This makes the demand for raw materials a derived demand, as it is dependent on the demand for the products they are used to create.

Key concepts

Labor Demand

In economics, labor demand represents firms' requirements for workers to produce goods and services. When there's an increase in the demand for a product, firms usually need more labor to manufacture more units of the product.
For example, if a particular car model becomes highly popular, the auto manufacturer might hire more workers to increase production. This process leads to an increase in labor demand, driven by the original demand for the vehicle.
The concept of derived demand underscores this relationship. Labor demand is not independent; it derives from the need for products and services in the market. Understanding this dependency helps in predicting employment trends in various sectors.

• When the demand for a product rises, expect higher labor demand.
• Conversely, if product demand falls, labor demand may decrease.

Raw Materials

Raw materials are the basic materials used as inputs to produce goods. The demand for raw materials is known as derived demand, as it depends on the demand for finished products.
Consider the production of furniture as an example. If there's a surge in the demand for furniture, the demand for raw materials like wood will rise accordingly.
This demand relationship is direct: more furniture requires more wood. Thus, industries must ensure they have a sufficient supply of raw materials to meet production demands and changes in consumer preferences.

• Greater product demand often increases raw material demand.
• Supply chains are adjusted based on predicted product demand.

Production Processes

Production processes refer to the methods and techniques used to transform raw materials into finished goods. The efficiency and cost-effectiveness of these processes significantly impact the overall production demand.
Enhanced production processes can boost a company’s capacity to meet consumer demands. For instance, adopting cutting-edge technology can streamline operations and reduce production time, thus allowing a company to respond quickly to increasing product demands.
Properly managing production processes ensures that companies remain competitive and can scale operations up or down based on market demand. Prospective improvements in production can effectively increase the output without necessarily increasing labor input or raw material costs.

• Efficient production processes lead to competitive pricing.
• Innovations in production technology can drive demand for finished goods.

Demand and Supply

Demand and supply are fundamental economic concepts that influence the market dynamics of goods and services. Demand refers to consumers’ willingness and ability to purchase goods at different prices, while supply is the quantity of a product that producers are willing and able to sell.
The interaction between demand and supply determines the market equilibrium, which is the price point where the quantity supplied equals the quantity demanded. Changes in either demand or supply can shift this equilibrium.
For derived demand, like that for raw materials or labor, changes in consumer demand for finished goods directly affect supply chain decisions. Businesses must therefore be adept at predicting shifts in both demand and supply to maintain a balanced production strategy and meet market needs efficiently.

• High demand with low supply often leads to increased prices.
• An oversupply might occur if market demand decreases unexpectedly.