Derived Demand

Derived demand is the demand for an intermediate good (or service) that results from the demand for or provision of another good (or service)—such as the demand for vehicles, gasoline, and parking spaces that occurs in order for people to enjoy time with friends, get food shopping done, sell their products in town, or supply their labor to employers. W. J. Baumol and A. S. Blinder provide the example of demand for fertilizer as derived from the underlying demand for corn, the final product. An increase in the demand for corn drives up corn prices, which drive up the marginal revenue product (MRP) of—and therefore demand for—fertilizer.

Transportation is largely a derived demand because its pursuit stems from a desire to engage in other activities. Generally, travel loses its value without the activities at the trip's origin and destination. Often modeled as a “dis-” utility or cost of engaging in the activity of interest, travel costs rise with travel time and trip expenses. Travel time has great value, and travel time savings typically constitute the greatest share of benefits that emerge from transportation system improvements. What differentiates transportation from other intermediate goods with derived demand is that it is not a stand-alone final product or service. “Unused” transportation movements (for example, under utilized highway capacity at a specific time and place or unsold seats on a flight) cannot be stored for use at a later time.

J.-P. Rodrigue et al. defined two types of transport-based derived demand. Direct derived transport demand directly results from activities. For example, in the case of employees commuting to work, the demand for transportation between residences and workplaces is a direct result of supply (households) and demand (employers) for labor. In freight movements, travel is a derived demand resulting from a supply chain moving other intermediate and final goods, such as raw materials, parts, and finished products. Indirect derived transport demand results from other transportation demands (which presumably are derived themselves from nontransport activities). For example, demand for roadside assistance (of a tow truck or emergency vehicle) results from the travel demand of the vehicle requiring assistance. In freight movement, warehousing demand can be considered an indirect derived demand, since it only exists as a result of differences between commodities available where they are produced and where they are consumed.

While transporting workers in Santa Clara County, California, the Altamont Commuter Express passes through this portion of the Don Edwards San Francisco Bay National Wildlife Refuge. A survey of nearly 2,000 San Francisco Bay Area residents found that a certain amount of commuting time was actually valued by many respondents, which contradicts some assumptions about derived demand. The average ideal commute time for respondents was 16 minutes; only 3 percent preferred a commute of 0-to-2 minutes.

Interestingly, some relatively recent studies have challenged the conventional idea of travel as a derived demand. P. L. Mokhtarian and I. Salomon provide conceptual and empirical evidence to [Page 430]highlight examples of undirected travel—like “joy rides,” recreational boating, biking for exercise, and running races. These are activities where travel/movement is the desired product, without any meaningful origin or destination. The researchers also propose that human desire for variety and curiosity may lead travelers to seek destinations (and routes) that are not necessarily the closest (shortest) in distance or least expensive to access. They argue that travel should not always be viewed as a disutility, due to some travelers' penchant for travel itself and the various valuable activities that can be conducted during travel, including enjoyment of music or news while driving, reading while riding on transit, and the health benefits of biking and walking. In a survey of almost 2,000 San Francisco Bay Area residents, Mokhtarian and Salomon found evidence of affinity for extra travel (such as for long-distance as compared to short-distance travel, for entertainment-related travel over less discretionary/more mandatory travel, and for travel by plane over car travel). The average reported ideal commute time was 16 minutes, with only 3 percent of respondents desiring a 0 to 2 minute commute, indicating that some non-negligible commute time or at least some distance from work is of value to many.

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