Question

What does it mean to say that resource demand is a derived demand? How does this concept become a part of the goal for profit maximization? What is the basic rule for resource use to minimize costs?

Answer 1

The ultimate goal, of all companies that work today, is the ability of them to generate sufficient profits for themselves. For this, they must actively engage themselves in the production of goods and services. These goods and services can only be produced if the firms demand for raw materials.

Thus, resource demand refers to that part of the demand in any economy which is done directly by the producers of other goods. Thus, such demand is not final in nature and it takes the producers effort to convert them into final goods and services which can then be sold in the economy respectively.

Therefore, the demand for resources can be said to be derived from the actual demand which consumers tend to have. For example:-

The demand for raw materials which are used in production of cars for example industrial paint, nuts & bolts, tyre's etc ultimately depend on the demand for car themselves.

Thus the derived nature of resource demand is such, that these can be utilized by producers only when the demand for final products is stable. Any decrease has an equal effect on resource demand and the opposite for increase is also true.

How does this concept become a part of the goal for profit maximization? What is the basic rule for resource use to minimize costs?

The concept of resource demand becomes an integral part of profit maximization. If the demand for final goods is adequate, firms try to negotiate at the price of raw materials also and try their best to increase profits by getting the resources at a relatively lesser rate and being able to gain higher profits respectively.

The basic rule for resource use to minimize costs is to utilize them in the best possible manner and to get highest possible productivity possible such that wastage can be minimized and the firm can maximize on its profits respectively.