SECTION TWO: Derived Demand and Derived Supply
The demand for some goods and services are clearly linked to the demand for other others goods and
services. The same is true of supply. For example, the demand for corn maize design and construction
services by farmers for agro-tourism is clearly linked to the demand for corn maze and other hands-on farm
experiences by city folks. Likewise, the supply of two-year-old thoroughbred horses “in-training” offered at
auction is clearly related to the supply of yearlings available the previous year.
This observation shows that the range of demand and supply shift factors affecting any particular
market is much broader than the only those primary factors previously discussed. Secondary and even
tertiary factors may filter back (in the case of demand) or forward (in the case of supply) through the
marketing chain and affect demand or supply. Economists call these secondary factors “derived demand
factors” and “derived supply factors”.
Consider an example. Suppose we wanted to identify factors affecting the demand for corn in the
U.S. In some cases, corn is demanded by retail consumers directly. Families and individuals buy and
consume “corn-on-the-cob” or frozen corn, for instance. In other cases, corn is demanded by processors for
the production of hogs, cattle, horses, and ethanol. The derivatives of these products—pork, beef, racing,
and low-cost gasoline blends—are later consumed by retail consumers. The demand for corn-on-the-cob and
frozen corn represents the primary demand for corn by retail consumers. The demand for corn by processors
is a form of derived demand for corn by retail consumers.
Derived supply works similarly. Suppose we wanted to identify factors affecting the supply of
pineapple juice in the U.S. We know that the supply of pineapple juice will decrease if pineapple juice
producers face increasing costs of production (e.g., higher costs for tin or plastic used to package the juice),
ceteris paribus. But what if the pineapple growers face higher production costs (e.g., higher fertilizer costs)?
These higher farm-level costs would likely cause pineapple growers to decrease supply, causing in turn an
increase in pineapple prices, ceteris paribus. If so, these higher farm-level pineapple prices increase the
production costs for pineapple juice processors and, in turn, should lead to a decrease in the supply of juice
(again, holding all else constant). Those forces that primarily affect only the supplier of the good or service
in question are called primary supply shift factors. Those factors that primarily affect suppliers further back
in the marketing chain are called derived supply shift factors.
SECTION TWO: Market Equilibrium
Market equilibrium is a unique price-quantity combination such that 1) producers produce and sell
only the number of units they are willing and able to produce, 2) consumers buy and consume only the
number of units they are willing and able to consume, and the number of units in both cases is the same.
Graphically, this is where the supply and demand curves intersect.
P
Figure 1. Market
Equilibrium
S
P1
D
Q1
13.2
Q
P
P
S
P2
P1
D2
S
P1
P2
D1
Q1 Q2
D2
Q
Q2 Q1
Figure 2. An increase in demand.
P
Q
Figure 3. A decrease in demand.
S2
1
P
S1
S2
P1
D1
S1
P2
P1
P2
D
D
Q1 Q2
Q2 Q1
Q
Figure 4. An increase in supply.
Q
Figure 5. A decrease in supply.
13.2