Derived Factor Demand: Definition & Overview

Instructor: Brianna Whiting
Sometimes we as consumers demand a product. When we want more of something, oftentimes the supplies needed to make that product also increase in number. In this lesson we will learn about derived factor demand and how it relates to inputs and outputs of production.

A Beginning Look at Derived Factor Demand

Meet Paul! Paul owns a small general store in the mountains of Colorado. His store carries basic supplies like snacks, water, and personal hygiene products, as well as area-specific supplies such as hiking gear, rafting gear, fishing gear, and even cameras and binoculars for sightseeing.

Over the years, Paul has noticed a trend in sales for certain products he offers. When summer rolls around, there seems to be a high demand in his outdoor products, especially for fishing poles when word gets out that the fish are biting. Essentially what Paul is experiencing is derived factor demand, which means as there is a demand for a good, in this case the fish, there is also a demand for a factor of production, which is the fishing pole.

Foundation Definition

Let's take a moment to define derived factor demand a bit more. Derived factor demand is the demand for a good or factor of production because of the demand for another good. In other words, it is a demand for a good because another good is derived from it. A great example might be a demand for leather because it is used in the production of another good such as a couch.

Another way to look at it is from a production point of view. The demand for inputs needed for production increase based upon the demand for the finished product. For example, there might be an increase in the demand of labor to run the machines to fulfill the orders of the newest model of car that is in high demand. Customers are not really demanding labor, they are demanding the car. However, in order to meet that demand, there needs to be more labor. So, the demand for the input (labor) is derived from the demand for the output (cars).

Examples

In this section we will apply what we have learned to some examples. Let's begin with Paul.

During the summer months people visit the mountains to participate in a variety of outdoor activities. Paul has mentioned fishing as one of the more popular activities. Each year during the early months of summer, the fishing is really good. Tourists hear this and want to fish because they know they have a good chance of catching something. So, ultimately more people come into Paul's store to purchase fishing poles. The actual poles are not what people are essentially demanding. They are demanding fish, which cannot be caught without the poles. Thus, the demand for the poles is derived from the demand for fish.

Now, here is a more in-depth example of derived factor demand in terms of production. Taking Paul again, we already know that there is a demand for fishing poles during the summer months. But in order to keep up with that high demand, there needs to be more labor and more money dumped into production. Tourists are not demanding labor and money. They are demanding fishing poles.

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