What does “derived demand of a factor” mean?
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Derived Demand of a Factor
Derived demand for a factor of production refers to the demand for an input that arises not from the direct desire for the input itself, but as a consequence of the demand for the final goods or services that the input helps to produce. In other words, the demand for the factor is 'derived' from the demand for the product it helps to create.
Dependence on Final Product's Demand: The key characteristic of derived demand is its dependence on the demand for the final product. For example, if there is a high demand for automobiles, there will be a derived demand for steel, rubber, and other materials used in car manufacturing, as well as for labor involved in the production process.
Elasticity Influence: The elasticity of demand for the final product can significantly influence the derived demand for the factor. If the final product has inelastic demand, the derived demand for the factor is likely to be more stable.
In summary, derived demand for a factor of production is a demand that exists because of the demand for another good or service. It is an essential concept in understanding how changes in market conditions for a product can affect the demand for inputs required to produce that product.