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| | It is obvious what the "demand" for a good is: it is the desire for the good by the public, in terms of how much the public is willing to pay for it. | | It is obvious what the "demand" for a good is: it is the desire for the good by the public, in terms of how much the public is willing to pay for it. |
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| − | "Derived demand" is a firm's demand for a good. The firm's demand is "derived from" the public demand for what the firm makes. "Derived demand" is the demand for "something" by a ''firm'' based on how much that "something" contributes to the finished goods sold by the firm to the public. | + | "Derived demand" is a firm's demand for something. The firm's demand is "derived from" the public demand for what the firm makes. "Derived demand" is the demand for "something" by a ''firm'' based on how much that "something" contributes to the finished goods sold by the firm to the public. |
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| | Every firm has "factors of production" in making its goods (or services). There are four basic "factors of production": | | Every firm has "factors of production" in making its goods (or services). There are four basic "factors of production": |
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| | The owner of a firm looks at its factors of production and must determine the derived demand for each factor, which is known as the "derived factor demand." | | The owner of a firm looks at its factors of production and must determine the derived demand for each factor, which is known as the "derived factor demand." |
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| − | A successful owner of a firm must make decisions about how much of each factor of production he needs. How much labor? How much capital (money)? How much land? How much entrepreneurship? To make those decisions in the best way possible, he needs to consider the "derived demand" for each factor: how much does each factor contribute to the finished goods sold by the firm. Put another way, what is the public's demand for the output produced by that factor? | + | A successful owner of a firm must make decisions about how much of each factor of production he needs. How much labor? How much capital (money)? How much land? How much entrepreneurship? To make those decisions in the best way possible, he needs to consider the "derived demand" for each factor: how much does each factor contribute to the finished goods sold by the firm? Put another way, what is the public's demand for the output produced by that factor? |
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| − | Let's take an example. Suppose you own a company (a firm). How many workers should you hire? Well, to answer that question you need to know what the demand is for your firm's goods, and then determine how much a new worker contributes towards making those goods. In other words, the number of workers hired depends on the public demand for the goods that the workers helped you produce. | + | Let's take an example. Suppose you own a company (a firm). How many workers should you hire? Well, to answer that question you need to know what the demand is for your firm's goods, and then determine how much a new worker contributes towards making those goods. In other words, the number of workers hired depends on the public demand for the goods that the workers help you produce. |
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| | Your demand for workers (labor) is a "derived demand" because it depends on the demand by the public for the goods your workers make. The demand by a firm to buy things is "derived from" the public demand for the goods the firm will produce. | | Your demand for workers (labor) is a "derived demand" because it depends on the demand by the public for the goods your workers make. The demand by a firm to buy things is "derived from" the public demand for the goods the firm will produce. |