Which of the following best illustrates the concept of derived demand?

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BlackTom AI · Accepted Answer

Question restatement: Which of the following best illustrates the concept of derived demand?

Option 1: Honda's reducing its car prices causes GM to do the same. This describes a price-change reaction between firms in the same industry, not derived demand. It focuses on price competition rather than how demand for a final good drives demand for inputs.

Option 2: The number of retail stores in a downtown area decreases while demand for retail goods increases. This scenario mixes store numbers with consumer demand for goods, but it does not connect the demand for a final good to the demand for the inputs used to produce that good. It’s more about retail supply planning than derived input demand.

Option 3: Steel manufacturers experience an increase in sales because of an increase in consumer demand for automobiles. This is a classic example of derived demand: the demand for steel (an input) rises because the demand for cars (a final good) has increased. Steel is not being demanded for its own sake; it is demanded because it is used to produce automobiles.

Option 4: A heat wave results in an increased demand for air conditioners. Here, the demand for a final good (air conditioners) increases due to a weather event. While it involves demand for a product, it does not illustrate derived demand for an input used to produce a different final good; it’s an example of a direct or final-goods demand driven by a temporary condition rather than an input’s derived demand from another product’s demand.

In summary, derived demand occurs when the demand for a factor of production (like steel) is driven by the demand for a final good (like automobiles). Among the options, only Option 3 clearly captures that linkage between final-goods demand and input demand, whereas the others involve price changes, supply conditions, or direct demand for a final product rather than the input-producing chain.

Which of the following best illustrates the concept of derived demand?

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