Derived demand is when demand for goods and services is generated as a result of demand for other goods and services. This can lead to an increase in price for resources needed to produce a product. Companies can take advantage of this by creating product lines where all items produced are related to each other. Virtually any combination of demand for goods and services is possible.
A derived demand is demand for goods and services that is generated as a result of demand for other goods and services. This specific type of demand refers to both producers and consumers, since the demand for a good or service may be related to the process required to produce another good or service. The phenomenon of derived demand can sometimes lead to an increase in the price of a marginal revenue product, as the demand for the resources needed to produce a physical product also increases.
Virtually any type of goods and services can be involved in a derived demand situation. Sometimes the demand for ancillary goods that work with a particular product increases as the desirability of that product increases. For example, if the product in question is men’s clothing, several other products may also be desirable for the same customer. This includes new shoes, a belt, a dress shirt and tie, and other accessories.
The same general principle can be applied to transport demand. To provide consumers with the various goods they want, it is often necessary to ship them to the area from distant locations. From this perspective, it can be said that the demand for Florida oranges in Minnesota would create a derived demand for reliable freight services to transport these oranges from Florida to Minnesota.
Some companies are structured to take advantage of the reality of derived demand and create product lines in which all items produced are related to each other. For example, a company might produce hot dogs as a primary product, but also produce buns, pickles, and mustard and ketchup as secondary products. Not only does this allow the company to meet consumer demand for hot dogs, it also satisfies the derived demand for goods that are often eaten with hot dogs.
Demand for any good or service, in turn, generates derived demand for other products. Virtually any kind of combination is possible, including a demand for a particular service that in turn generates a demand for a specific good. Teleconferencing services are a common demand in many organizations which in turn triggers a demand for products such as speakerphone. Suppliers provide a service to consumers, but they in turn have a demand for food and various types of equipment essential to providing that service. For companies that can identify demand for multiple products triggered by the desire for a particular product, the opportunity to increase turnover and earn a healthy return is significantly enhanced.
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