Derived demand—in economics—is the demand for a good or service that results from the demand for a different, or related, good or service. It is a demand for some physical or intangible thing where a market exists for both related goods and services in question. Derived demand can have a significant impact on the derived product's market price. Derived demand is related solely to the demand placed on a good or service for its ability to acquire or produce another good or service. Derived demand can be spurred by what is required to complete the production of a particular good, including the capital, land, labor, and necessary raw materials. In these instances, the demand for raw material is directly tied to the demand for products that require the raw material for their production. The demand that is derived from the demand for another product can be an excellent investing strategy when used to anticipate the potential market for goods outside of the original product desired. In addition, if activity in one sector increases, then any sector that's responsible for the first sector’s success may also see gains.
The principles of derived demand work in both directions. If the demand for a product decreases, then the demand for the goods required to produce that product will also decrease. The pick-and-shovel investment strategy employs the principles of derived demand because it invests in the underlying technology needed to produce a good or service instead of investing in the final product, itself. It is a way to invest in a specific industry without being exposed to the market risks of the end product. This strategy is named after the tools used to mine for gold during the California Gold Rush of the 1840s and 1850s. Prospectors needed to buy picks and shovels to mine for gold. So, though there was no guarantee that a prospector would find gold, the companies that sold picks and shovels were earning revenue, and thus were considered good investments during that era. The demand for picks and shovels was derived largely from the demand for gold. As more businesses become dependent on computer technology and people expand their home-computing capabilities, the demand for computers rises. Consequently, we may see derived demand in the related products of computer peripherals such as computer mice, monitors, external drives, and so on. We also could see derived demand for the internal components of computers, like motherboards and video cards, and the materials required to produce them.
Certain production materials may not experience large-scale changes based on increases or decreases in demand for a specific product based on how widely the production materials are used. For example, cotton is widely used to manufacture fabric. But if a particular print or color of cotton fabric is popular during a specific season, and its popularity diminishes over the course of a few seasons, then this may not have a large impact on the demand for cotton in general.
Demand is an economic concept that relates to a consumer's desire to purchase goods and services and willingness to pay a specific price for them. An increase in the price of a good or service tends to decrease the quantity demanded. Likewise, a decrease in the price of a good or service will increase the quantity demanded. Demand is a concept that consumers and businesses are very familiar with because it makes sense and occurs naturally in the course of practically any day. For example, shoppers with an eye on products that they want will buy more when the products' prices are low. When something happens to raise the prices, such as a change of season, shoppers buy fewer or perhaps none at all. Generally speaking, there is market demand and aggregate demand. Market demand is the total quantity demanded by all consumers in a market for a given good. Aggregate demand is the total demand for all goods and services in an economy. Multiple stocking strategies are often required to handle demand.
Businesses can spend a considerable amount of money to determine the amount of demand the public has for their products and services. How many of their goods will they actually be able to sell at any given price? Incorrect estimations can result in lost sales from willing buyers if demand is underestimated or losses from leftover inventory if demand is overestimated. Demand helps fuel profits and the economy. That's why it's an important concept. Demand is closely related to the concept of supply. While consumers try to pay the lowest prices they can for goods and services, suppliers try to maximize profits. If suppliers charge too much for a product, the quantity demanded drops and suppliers may not sell enough product to earn sufficient profits. If suppliers charge too little, the quantity demanded increases but lower prices may not cover suppliers’ costs or allow for profits. Some factors affecting demand include the appeal of a good or service, the availability of competing goods, the availability of financing, and the perceived availability of a good or service.
Demand elasticity relates to how sensitive the demand for a product is as the price for it changes. For example, if there's a big change in demand due to a small change in price, demand elasticity is said to be high. Shoppers may choose attractive substitute products if the price for their usual product has increased somewhat. That could indicate high demand elasticity and is useful for businesses to know. There are five main factors that drive demand:
As these factors change, so can the demand for a product or service. In fact, they change all the time, so demand can be constantly in flux. The law of demand states that when prices rise, demand will fall. When prices fall, demand will rise. The law of demand is simply an expression of the inverse relationship between price and demand. It involves price only. None of the other drivers of demand mentioned above are involved. If they do come into play, the functioning of the law can be affected. Demand can be seen to change for reasons other than price. A demand curve is a graph that displays the change in demand resulting from a change in price. It's a visual representation of the law of demand. The demand curve can be a useful tool for businesses because it can show them the prices at which consumers start buying less or more. It can point out prices at which a company can maintain consumer demand and support reasonable profits. On the demand curve graph, the vertical axis denotes the price, while the horizontal axis denotes the quantity demanded. A demand schedule, or table created by a business that lists the quantity of a product that consumers will buy at particular price points, can provide the figures for the demand curve chart. Once plotted, the demand curve slopes downward, from left to right. As prices increase, consumers demand less of a good or service. A supply curve slopes upward. As prices increase, suppliers provide more of a good or service. The point where supply and demand curves intersect represents the market clearing or market equilibrium price. An increase in demand shifts the demand curve to the right. The two curves then intersect at a higher price, which means consumers are willing to pay more for the product. Equilibrium prices typically change for most goods and services because factors affecting supply and demand are always changing. Free, competitive markets tend to push prices toward market equilibrium. The market for each good in an economy faces a different set of circumstances, which vary in type and degree. In macroeconomics, we also look at aggregate demand in an economy. Aggregate demand refers to the total demand by all consumers for all goods and services in an economy across all the markets for individual goods. Since aggregate demand includes all goods in an economy, it is not sensitive to competition or the substitution of goods. Nor is it to changes in consumer preferences between various goods. Demand in individual goods markets can be affected by these factors. Fiscal and monetary authorities, such as the Federal Reserve, devote much of their macroeconomic policy-making to managing aggregate demand. If the Fed wants to reduce demand, it can raise interest rates and increase prices by curtailing the growth of the money supply and credit. If it needs to increase demand, the Fed can lower interest rates and increase the money supply, giving consumers and businesses more money to spend. In certain cases, even the Fed can’t fuel demand. When unemployment is on the rise, people may not be able to afford to spend or take on cheaper debt, even with low interest rates.
The economic principle of demand concerns the quantity of a particular product or service that consumers are willing to purchase at various prices. Demand looks at a market's pricing and purchases from a consumer's point of view. On the other hand, the principle of supply underscores the point of view of the supplier of the product or service.
The demand curve is a graphical representation of the law of demand. It plots prices on a chart. The line that connects those prices is the demand curve. The vertical axis represents prices of products. The horizontal axis represents product quantity. Typically, the curve starts on the left side high up the vertical axis and descends across the chart to the right. The slope indicates that as prices decrease, demand, as shown by growing number of products purchased, increases.
Economically speaking, the principle of demand has importance for both consumers and businesses that sell products and/or services. For businesses, understanding demand is vital when making decisions about inventory, pricing, and aiming for a particular profit. Consumers who have an understanding of demand can make confident decisions about what products to buy and when to buy them. |
What refers to people with unsatisfied wants and needs who are willing and able to buy a product or service?
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