Demands for Factors Are Derived Demands

Let’s consider the demand for office space by a firm which produces computer software. A software company will rent office space for its programmers, customer service representatives, and other workers. Similarly, other companies like pizza shops or banks will need space for their activities. In each region, there will k a downward-sloping demand curve for office space linking the rental being charged by landlords to the amount of office space desired by companies- the lower the price, the more space companies will want to rent.

But there is an essential difference between ordinary demands by consumers and the demand by firms for inputs. Consumers demand final goods like computer games or pizzas because of the direct enjoyment or utility these consumption goods provide. By contrast, a business does not pay for inputs like office space because they yield direct satisfaction Rather, it buys inputs because of the production and revenue that it can gain from employment of those factors.

Satisfactions are in the picture for inputs-s-but at one stage removed, The satisfaction that consumers get from playing computer games determines how many games the software company can sell, how many order takers it needs, and how much office space it must rent. The more successful its software, the greater it” office space. An accurate analysis of the demand for inputs must, therefore, recognize that consumer demands do ultimately determine business demands for office space. This analysis is not limited to office space. Consumer demands determine the demand for all inputs, including farmland, oil, and pizza ovens. Can you see how the demand for professors of economics is ultimately determined by the demand for economics courses by students? The firm’s demand for inputs is derived indirectly from the consumer demand for it, final product.

Economists therefore speak of the demand for productive factors as a derived demand. This means that when firms demand an input, they do so because that input permits them to produce a good which consumers desire now or in the future . Figure 12-2 on page 229 shows how the demand for a given input, such as fertile cornland, must be regarded as being derived from the consumer demand curve for corn. In the same way, the demand for office space is derived from the consumer demand for software and all the other products and services provided by the companies that rent office space.

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