Definition
- Derived demand
- Derived demand is the demand for an input such as labour, which depends on the demand for the product the firm is producing.
- Not to be confused with: Marginal revenue product
- The marginal revenue product of labour is the marginal product of one more worker multiplied by the marginal revenue from selling that output.
Example
Can you think of an example of derived demand?
A bakery sells loaves at a market price of £2. Its fourth baker adds 8 loaves an hour, a marginal revenue product of £16, and a fifth would add 5 loaves, worth £10. At a wage of £12 an hour it hires four bakers. If demand for bread lifts the price to £2.50, the fifth baker's output is worth £12.50 and a sixth's 4 loaves only £10, so the bakery hires five at the same wage.
Test yourself
What is the difference between derived demand and marginal revenue product?
Marginal revenue product: The marginal revenue product of labour is the marginal product of one more worker multiplied by the marginal revenue from selling that output.