In Business, what is a Derived Demand?

A derived demand is the demand for goods and services that is generated as the result of the demand for other goods and services. This particular type of demand relates to both producers and consumers, since the demand for one good or service may be related to the process necessary 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 required to produce a physical product also increases.

Just about any type of goods and services can be involved in a derived demand situation. At times, the demand for ancillary goods that work with a given product is increased as the desirability for that product increases. For example, if the product in question is a man’s suit, a number of other goods may also be desirable to the same customer. This would include new shoes, a belt, a dress shirt, and a tie, as well as other accessories.

The same general principle can be applied to the demand for transportation. In order to supply consumers with various goods they desire, it is often necessary to ship those goods into the area from distant locations. From this perspective, it could be said that the demand for Florida oranges in Minnesota would create derived demand for reliable freight services to transport those oranges from Florida to Minnesota.

Some businesses are structured to take advantage of the reality of derived demand, and create product lines where all the items produced have some relation to one another. For example, a company may produce hot dogs as a main product, but also produce buns, pickles, and mustard and ketchup as secondary products. Doing so not only allows the company to fill the consumer demand for hot dogs, but also satisfy the derivative demand for goods that are often consumed along with the hot dogs.

The demand for any good or service in turn generates derived demand for other products. Just about any type of combination is possible, including a demand for a given service that in turn generates a demand for a specific good. Teleconferencing services are a common demand in many organizations that in turn triggers a demand for goods like speakerphones. Caterers provide a service to consumers, but in turn have a demand for food and various types of equipment that are key to providing that service. For businesses that can identify demand for various products that is triggered by the desire for one particular product, the opportunity to increase business volume and earn a healthy return is enhanced significantly.