Derived Demand
Candlefocus EditorEssentially, derived demand is derived from the demand for a certain type of end product. If a customer wants to buy a product, such as an iPhone, they will need to purchase the components that make up the phone. From that, demand is derived for the parts to build the phone, such as a processor, a display, memory chips, and other parts. Demand is also derived for services such as support and customer service related to the iPhone.
In business-to-business markets, derived demand can be seen in a variety of ways. For example, consider a company that is a supplier of automation services and software. This company would need to purchase services and materials in order to build their software products. As a result, demand is generated for the services and materials that go into the building of those software products.
Derived demand can also be seen in the stock market. Generally, a company's share price reflects the amount of demand for a company's product or service. When the demand for a company's product or service increases, their stock price typically rises, creating an increased demand for that product or service. This same concept applies to bond prices, which are a reflection of the demand for borrowing money.
Ultimately, derived demand is a fundamental concept of economics and an important concept for businesses to understand. When businesses understand how their products and services create a demand for other products and services, they can make wiser decisions regarding the materials, services, and production processes that go into their own products. Understanding derived demand can help businesses find the most efficient way to produce and market their products, increasing their effectiveness and profitability.