Which statement best illustrates the concept of derived demand?

Question

BlackTom AI · Accepted Answer

Let’s begin by carefully restating the scenario to frame what derived demand means in this context.
Option 1: 'The number of retail stores in a downtown area decreases even though demand for retail goods increases.' This seems contradictory at first glance, as rising demand for goods would normally support more stores, not fewer. It does not illustrate derived demand because it doesn’t show demand for one good or factor arising from demand for another good or service.
Option 2: 'An increase in the number of new, single-family homes results from a spike in the gross national product.' Here, the rise in housing is directly tied to overall economic activity (GDP). It doesn’t demonstrate derived demand for a factor of production that hinges on demand for another good; it’s more about endogenous growth, not the chain of demand from a final good to its inputs.
Option 3: 'Honda reducing its car prices causes GM to do the same.' This is about strategic pricing among firms, an inter-firm competitive response, not about a request for inputs or inputs’ demand driven by the demand for a final good.
Option 4: 'A Chinese plastics company decreases its output because of its customers’ reduction in toy exports to the United States.' This precisely exemplifies derived demand: the plastics producer’s demand for its own inputs (plastic resins, labor, machinery) is driven by the demand for finished toys abroad. If toy demand falls, toy manufacturers buy less plastic, which cascades to the plastics suppliers, illustrating demand for inputs that stems from demand for a final good.
Option 5: 'A heat wave results in an increased demand for air conditioners.' While this shows a shift in demand due to a weather event, it reflects the direct demand for a final good (air conditioners) rather than derived demand for inputs caused by changes in demand for another product. It’s a current demand surge for a product, not a derived input-demand chain.
In summary, the essence of derived demand is that the demand for factors of production arises from the demand for the final goods and services that use those factors. Among the choices, only Option 4 explicitly traces that chain from toy demand to plastics output, capturing the core concept of derived demand.

Which statement best illustrates the concept of derived demand?

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