What is meant by derived demand of a factor : Derived demand refers to the demand for a factor of production that arises from the demand for the goods and services it helps produce, rather than being demanded for its own sake. In other words, the demand for a factor of production is derived from the demand for the final products that require that factor in their production process.
Example:-
- Consider the demand for labour in the construction industry.
- The demand for labour is not driven by a desire for labour itself, but rather by the demand for new buildings, houses, roads, and other construction projects.
- The construction industry employs labour (the factor of production) to carry out the tasks necessary for building these structures.
- If there is an increase in demand for new construction projects, the demand for labour will also increase as firms need more workers to complete the projects.
The concept of derived demand is closely linked to the idea that factors of production are used to produce goods and services that are demanded by consumers. As consumer preferences and demand for specific products change, it leads to corresponding changes in the demand for the factors of production used to produce those products.
In addition to labour, other factors of production such as raw materials, capital equipment, and specialised machinery also experience derived demand. For instance, the demand for steel is derived from the demand for automobiles, appliances, and construction materials that use steel as an input.
In summary ,it’s refers to for a factor of production that originates from the demand for the goods and services it helps produce. It highlights the interconnectedness of production and consumption in the economy, where factors of production are employed to create products that satisfy consumer wants and needs.