Question

Derived demand can be defined as demand that is

A) independent of price.
B) independent of consumer wants and needs.
C) dependent on another source.
D) highly volatile.
E) highly responsive to factors other than price.

Answer 1

Derived demand is the demand for inputs like labor, which is dependent on the demand for the product a firm is producing. An increase in demand for the firm's product drives up the product's price, which increases the firm's demand for labor.

Derived Demand

Economists describe the demand for inputs like labor as a derived demand. Since the demand for labor is MPL*P, it is dependent on the demand for the product the firm is producing. We show this by the P term in the demand for labor. An increase in demand for the firm's product drives up the product's price, which increases the firm's demand for labor. Thus, we derive the demand for labor from the demand for the firm's output.