Explain the concept of derived demand.

Derived demand refers to the demand for a good or service that arises from the demand for another related good or service.

Derived demand is a fundamental concept in economics that explains how the demand for one product or service is directly linked to the demand for another. This is often seen in the relationship between consumer goods and the resources used to produce them. For instance, if there is a high demand for wooden furniture, this will lead to a derived demand for timber, carpenters, and woodworking tools.

The concept of derived demand is crucial in understanding the interdependencies within an economy. It helps to explain how changes in consumer preferences can have a ripple effect throughout various sectors and industries. For example, if consumers suddenly develop a preference for electric cars over petrol cars, this will not only increase the demand for electric cars but also for the inputs required to produce them, such as lithium for batteries. This in turn could decrease the demand for petrol and the resources used in its production.

Derived demand can also be influenced by technological changes. For instance, the rise of digital technology has led to a decrease in the demand for physical books, which in turn has reduced the derived demand for paper and printing services. Conversely, it has increased the derived demand for e-readers and digital publishing services.

In the labour market, derived demand is seen in the demand for particular skills or professions. If a certain industry is growing, there will be a derived demand for workers with the skills needed in that industry. For example, the growth of the tech industry has led to a derived demand for software developers and data scientists.

In conclusion, understanding derived demand is essential for businesses and policy makers. It helps businesses to anticipate changes in the demand for their products or services and to plan accordingly. For policy makers, it provides insights into how changes in one sector can impact others, which can inform decisions on issues such as employment policies and industrial strategy.