Question

Why is the demand for factor inputs, such as labor, a derived demand?

Answer 1

• We can define derived demand as the demand for any intermediate good or a factor input due to the demand of another good.
• It is the demand that is derived as a result of the demand for any other good.
• The demand for factor inputs is a derived demand because these inputs are the intermediate goods that are useful in the production of a final good.
• When the demand for these final goods rise, then the demand for its factor inputs used in the production of these goods also rise without Which production of that good becomes impossible.
• In the case of labour, let us consider labour as a factor input used in the production of dolls. If more number of dolls are demanded by the consumer's, the firm will have to increase the production level for which it will require more worker's.
• This will eventually Increase the demand for labour and create more employment opportunities. Hence the labour is said to have a derived demand.