Derived demand?

Question

How do you calculate derived demand?

Answer 1

Derived demand is a term in economics, where demand for one good or service occurs as a result of demand for another. This may occur as the former is a part of production of the second. For example, demand for coal leads to derived demand for mining, as coal must be mined for coal to be consumed.

Demand for transport is a good example of derived demand, as users of transport are very often consuming the service not because they benefit from consumption directly (except in cases such as pleasure cruises), but because they wish to partake in other consumption elsewhere.

Derived demand applies to both consumers and producers. Producers have a derived demand for employees, the employees themselves are not demanded, rather the skills and productivity that they bring.

Tickets are a derived demand for entertainment. Entertainment is the demand being satisfied when a ticket is bought, it is purely a means to an end. The ticket is not an end in itself. The ticket is merely a licence to attend a specified event at a specified time and place. The ticket agency is merely that, an agent of the principal (the event owner) authorised to make a transaction with a prospective attendee on the behalf of the principal.

Answer 2

From a utility function?  Let's say you have utility function U=(q1)(q2)

Start with the income function

Y=p1q1+p2q2

Rearrange to solve for q2

q2=(Y-p1q1)/p2

substitute that into the utility function

U=q1((Y-p1q1)/p2)

Take the derivative and find the first order condition

U'=Y/p2-2p1q1/p2=0

Y/p2=2p1q1/p2

Now rearrange and solve for q1

q1=Yp2/2p1p2

q1=Y/2p1

And that's your demand function for q1

To find the demand for q2, substitute your q1 into the equation for q2 you found in the beginning

q2=(Y-p1(Y/2p1)/p2

q2=Y/p2-Yp1/2p1p2

q2=Y/p2-Y/2p2

q2=Y/2p2

Answer 3

Cost of a derived demand is a direct variable of originating product or service.  

Each pair of shoes requires a pair of laces.

Limosine service requires a driver.