relationships between different markets: derived demand

Think of a market as a big dance floor.

The price is the music that tells everyone when to step forward or back.

When the music (price) is high, buyers want to step back (buy less), and sellers want to step forward (sell more).

When the music slows (price falls), buyers step forward and sellers step back.

Key Concepts

• Demand Curve – shows the relationship between price and quantity demanded: \$Q_d = a - bP\$.
• Supply Curve – shows the relationship between price and quantity supplied: \$Q_s = c + dP\$.
• Equilibrium – where \$Qd = Qs\$, giving equilibrium price \$P^*\$ and quantity \$Q^*\$.
• Shifts – changes in factors other than price (e.g., income, tastes) move the whole curve.

Shifts vs. Movements

1. Movement along a curve – caused by a change in price only.
2. Shift of a curve – caused by a change in a non-price determinant (e.g., technology, population).

Graphical Illustration

Imagine a graph where the x‑axis is quantity and the y‑axis is price.

The demand curve slopes downward, the supply curve slopes upward.

Their intersection is the equilibrium.

Derived demand is the demand for a input that is generated by the demand for a final good.

It’s like the demand for a paintbrush being driven by the demand for paintings.

Examples

• Demand for steel rises when the demand for cars rises.
• Demand for labour in software increases as the demand for new apps grows.
• Demand for electricity rises with the demand for smartphones and data centres.

Key Points

1. Derived demand is always indirect – it depends on the final product.
2. Changes in the final market (price, income, technology) ripple through to the input markets.
3. Policymakers can influence derived demand by targeting the final goods (e.g., subsidies for electric cars).

Illustration: The Car & Steel Relationship

When the price of cars falls, more people buy cars → demand for cars ↑ → demand for steel ↑ (since cars need steel).

This is a classic example of derived demand.

1. Diagram Clarity – Always label axes, curves, and equilibrium points. Use arrows to show shifts.

2. Define Terms – Briefly define demand, supply, equilibrium, shift, movement, derived demand.

3. Use Real‑World Examples – Show how a change in consumer income or technology affects markets.

4. Show Calculations – If given equations, compute new equilibrium after a shift.

5. Relate to Derived Demand – Explain how a change in the final market impacts input markets.

Remember: clarity and relevance win the examiners’ favour!