What is derived demand?

Derived demand occurs when the demand for a particular product depends on the demand for another product or activity. Take steel for example, it is demanded for the use it can provide things such as car manufacturing, not because it looks pretty (i.e. for itself)




Looking at the diagram above we see when there is an increase in demand for cars, this causes an increase in demand for steel which is used in order to manufacture the cars. Steel is therefore in derived demand.