Page 29 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes Guarantee
Tanishq has managed to establish its position in the market because its quality products
are backed by a guarantee certificate. Each item of jewellery that is sold is accompanied by
a guarantee card that states the weight of the gold/platinum as well as the cartage of the
gemstones used. In case of any discrepancy the company is liable for legal action. All
diamonds used are VVS certified, and the platinum is passed by the official Platinum
Authority of India. 100% purity backed by an ironclad guarantee is thus the hallmark of
Tanishq jewellery. This is a major demand inducer as the traditional jewelers are
increasingly fudging on such things.
Question
Analyse the role of other factors (other than price of products) in influencing the demand
for Tanshiq's products.

2.1.3 Direct and Derived Demand

You must have noticed that our demand for basic necessities, like demand for food, clothing and
shelter, is independent of demand for any other good. On the other hand, demand for labour is
dependent on our demand for houses or products and demand for mobile phones depend on our
demand for communication with each other. The goods whose demand does not depend on the
demand for some other goods are said to have a direct demand, while the rest have derived
demand. However, there is hardly anything whose demand is totally independent of any other
demand. But the degree of this dependence varies widely from product to product. Thus, the
direct and derived demand varies in degree more than in kind.

Notes Transportation as a Derived Demand
In economic systems what takes place in one sector has impacts on another; demand for a
good or service in one sector is derived from another. For instance, a consumer buying a
good in a store will likely trigger the replacement of this product, which will generate
demands for activities such as manufacturing, resource extraction and, of course, transport.
What is different about transport is that it cannot exist alone and a movement cannot be
stored. An unsold product can remain on the shelf of a store until a customer buys it (often
with discount incentives), but an unsold seat on a flight or unused cargo capacity in the
same flight remain unsold and cannot be brought back as additional capacity later. In this
case an opportunity has been missed since the amount of transport being offered has
exceeded the demand for it. The derived demand of transportation is often very difficult to
reconcile with an equivalent supply and actually transport companies would prefer to
have some additional capacity to accommodate unforeseen demand (often at much higher
prices). There are two major types of derived transport demand:
Direct derived demand: This refers to movements that are directly the outcome of economic
activities, without which they would not take place. For instance, work-related activities
commonly involve commuting between the place of residence and the workplace. There
is a supply of work in one location (residence) and a demand of labor in another (workplace),
transportation (commuting) being directly derived from this relationship. For freight
transportation, all the components of a supply chain require movements of raw materials,
parts and finished products on modes such as trucks, rail or containerships. Thus,
transportation is directly the outcome of the functions of production and consumption.
Indirect derived demand: Considers movements created by the requirements of other
movements. The most obvious example is energy where fuel consumption from transportation
Contd...

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