Derived demand in economics is a demand for goods and services resulting from the demand for different, or related, goods and services. Derived demand can be a demand for some physical or intangible thing where a market exists for the related goods and services. Derived demand can have a significant impact on the market price of derivative products.
Definition of Derived demand
You could say “Derived demand” only has a relationship with the demand placed on goods and services based on their ability to obtain or produce other goods and services. Derived demand can be driven by several things needed to complete the production of certain goods, such as capital, land, labor, raw materials and all kinds of materials needed. So in this case, the demand for these materials will go directly to the demand for products that require raw materials for their production. Actually, a request that comes from the demand for other products, can be used as an investment strategy that is very profitable if it is used to anticipate if the market is in a condition where there is no original desired product. The basic principle of Derived demand, which can work in two directions. If the demand for an item is decreasing, then what will happen is, the demand for the goods needed to produce the product can also decrease.
Example of Derived demand Investment Strategy
Use of the Pick-and-Shovel strategy. Where the strategy uses the principle of demand that comes from investment in technology, and becomes the basis needed to produce goods or services. So, the investment is not in the final product which is already in the form of goods, but rather in the materials needed for production. In my opinion, this strategy is less risky and there is no need to worry if the price of the final product is in a state of exposure.
Derived demand in trading tools
Let’s just say I’m a shovel seller, which is a tool for digging soil. And the current condition of society is all feverish to mine gold. Of course as miners, they will need tools to dig for gold to get gold, although not necessarily and there is no guarantee of getting gold if they buy a shovel. I as a shovel seller still receive profits, and it is also a profitable investment as long as the community is still feverish to mine gold.
Derived demand in computer technology
Nowadays almost all human activities have used computers and many of them have upgraded their computer capabilities. After knowing that most people are looking to upgrade their computers, I decided to give Derived demand to products related to computers, such as mice, motherboards, processors, graphics cards and other computer-related materials.
Core Point of Derived demand:
Derived demand is an economic term that refers to the demand for goods or services resulting from the demand for different goods or services.
Derived demand is only related to demand related to products or services, because the ability of Derived demand is to produce goods or services related to the final product.
In economics, derived demand refers to the demand for derivatives. What is a derived request? namely the demand for products or services that arise as a result of the demand for other products or services that are related and needed. For example, the increased demand for smartphones and other mobile devices will also increase the demand for lithium, because lithium is used to make batteries. Apart from lithium, other products that may also experience increased demand include custom cases, anti-radiation, glass screens or scratch-resistant glass, microchips, SIM cards, etc. Another example of this derivative demand, such as demand for widescreen TVs, smart TVs, or Android TVs, will create demand for home theater and sound system products such as speakers, amplifiers, internet connections and installations, and so on.
Demand stemming from demand for other products can be an excellent investment strategy. For example, if someone has a XXX brand vehicle, there must be times when they want to replace the spear part of the vehicle by using a brand outside the manufacturer.
The demand that is created due to an increase in demand for other related products can be a very good investment strategy to anticipate potential goods other than the original product desired by consumers. When activity in the main sector increases, then other sectors that play a role in supporting the main success, of course, will also benefit. There are 3 (three) components in derived demand, namely raw materials, processed materials, and labor, these three components will synergize with each other to create a derivative demand chain.
Raw materials (raw materials)
Raw materials are also called raw materials or materials that have not been processed in production. The level of demand for these raw goods, will depend on the level of final demand for goods or services to be produced. For example, when there is an increase in demand for new homes, there will also be an increase in demand for sand, stone or logs.
Processed Materials
Processed materials are products that are produced or assembled from raw materials. For example, plates made of glass, gasoline made from crude oil, cloth made from processed cotton, boards or ironwood made from logs, cement made from limestone and limestone, and so on.
Labor
To produce goods or services, of course, requires labor, and the level of demand for this labor will depend on the level of demand for these goods or services. The higher the level of demand for goods or services, of course, the higher the need for labor. There can be no demand for labor without a demand for goods and services.
The Effect of Derived Demand on the Economy
Outside of industry, workers and consumers are directly involved by derivative demand chains that can flow through local and even international economies. For example, personal clothing made by a small local tailor can create a new local market for shoes, jewelry, and other high-end fashion accessories.
At the international level, increasing demand for raw materials such as crude oil, wood or cotton can create large new international markets for countries that have a lot of these materials.
