Composite Demand

Article byKosha Mehta
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Composite Demand?

Composite demand implies the demand of a product which have multiple uses. It may be as a final product or as rawmaterial in making of a product. For instance, wood is required for construction, the manufacture of furniture, and paper, amongst a significant number of other applications.

Composite Demand

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Composite Demand (wallstreetmojo.com)

Products having composite demand have various implications in terms of demand and supply of other products in which it is used. For example, the demand and price of wood may increase as the demand for houses increases, but that will ultimately lead to a price hike in furniture. Economists used this concept to understand the inter dependability of factors.

Key Takeaways

  • The term “composite demand” refers to the situation in which one item or product is used to manufacture more than one product.
  • Milk, for instance, may be processed into a wide range of dairy products, including cheese, yogurt, cream, and butter.
  • Products with composite demand can have several different effects on the demand and supply of other products in which they are utilized.
  • For products with composite demand, an increase in demand for one product might lead to a drop in the supply of another.

Composite Demand Explained

When commodities or services may be put to more than one use, a phenomenon known as composite demand can occur. This means that a rise in the demand for one item may cause a reduction in the supply of another. For example, milk may be transformed into a variety of dairy products such as cheese, yogurt, cream, and butter. As a result, when more milk is utilized in cheese production, there is less milk available to produce butter.

Demand for a product that may be utilized in various ways. As an illustration, people may desire oil since it may be converted into gasoline or polymers.

As a result of the effect of composite demand, changes can be seen in the prices of related products. For example, if there is a greater demand for biofuel, then the price of wheat used to make bread will also increase. As a result, less wheat is available for bread production since more people are asking for it to be used in biofuels.

Wheat might be in demand because it generates bread, biofuels, and feed for cattle. Farming and the construction of homes are both feasible uses for the land. Wheat could be in demand because it is used to produce biofuels. Steel may be utilized in the production of bicycles and as a potential material for armored vehicles. If we build more houses, there will be less land available for farming, which would likely cause the price of agricultural land to rise.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Examples

Let us look at composite demand examples to understand the concept better.

Example #1

For instance, consider that a company was studying phone demand and usage. Upon interacting with the study respondents who are phone users, various parameters affecting the demand were found. The primary parameter is that phones have a composite demand. For example, people wanting to have a good camera buy a phone, people willing to connect with others also buy a phone, and someone who wants an internet connection also buys a phone. Thus, the company researched buying behavior and demand for phones and considered their varied use cases.

Example #2

A product having composite demand can Many private firms who have entered the space of zero wastage have started using products with multiple usages, i.e., composite products. For example, leftover and decaying wheat are converted into biofuel. These multiple usabilities of the product ensure that the product can be put to a different use. However, one downside is that it affects the demand for other products.

Graph

Let us look at the composite demand graph to understand the concept better.

Composite Demand Graph

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Composite Demand (wallstreetmojo.com)

Consider that the graph on the right illustrates the overall demand for milk commodities. The X-axis represents the quantity demanded. The cost of milk is shown along the Y-axis. Milk’s demand is impacted by the demand for various elements since milk has a composite demand. For example, the demand for sweets, cheese, yogurt, cream, and packaged milk all contribute to the total demand for milk.

The above graph indicates a rise in the demand for milk from demand 1 to demand 2. It may be due to increased demand for either one or all of the goods manufactured from milk. For example, it’s possible that during the festival season, there is an increase in demand for cream and sweets, which in turn causes an increase in demand for milk.

The price goes up in response to the significant rise in demand. The graph shows that the price goes up from point p1 to point p2. Because it is a composite demand, the demand may have grown as a result of one thing, yet, this affects all of the items associated with it.

Similar to how it worked in our demonstration, a rise in the demand for sweets and cream drives up the total demand for milk. The cost of milk goes up as a direct result of this. Even if an increased desire for sweets mainly causes increasing milk demand, it still influences the price of raw milk, butter, and milk that has already been packaged.

Difference Between Joint Demand And Composite Demand

  • The term “composite demand” refers to the many different applications that may be found for a particular resource. The majority of commodities have a wide variety of different applications. Therefore, purchasing one product simultaneously as purchasing another good implies “joint demand.”
  • To illustrate the concept of composite demand, consider that the production of ice cream competes with the manufacture of chocolate for the same amount of sugar. To understand joint demand, consider a consumer buying a television. He must sign up for a film streaming service membership simultaneously. Thus TV and streaming services have a joint demand.
  • Because of composite demand, the products do not complement one another. However, they become complementary when there is a joint demand for the items.

Difference Between Derived Demand And Composite Demand

  • The term “composite demand” refers to the many applications that may be found for a resource. Most commodities have a wide variety of different applications. The demand for a factor of production utilized in creating another commodity or service is referred to as “derived demand.”
  • As an example of derived demand, let us consider the case of steel. Its demand is derived from the market demand for automobiles and the construction of new structures. As an example of composite demand, consider that the production of ice cream competes with the manufacture of chocolate for the same amount of sugar.
  • In the case of composite demand, a rise in the demand for one item results in a reduction in the supply that is available for another product. A rise in the demand for one commodity leads to an increase in the demand for another good. This phenomenon is known as “derived demand.”

Frequently Asked Questions (FAQs)

Are milk and oil composite demand?

Milk and oil both have composite demand because they serve numerous functions. For example, in addition to being a food product in and of itself, milk is also used to make ghee, butter, curd, etc. Likewise, the oil may be in demand since it may be used to generate both gasoline and polymers.

What is the difference between composite demand vs joint supply?

The composite demand for a product is determined by adding up the individual demand of all of the producers who use that input to produce their consumer goods. Whereas the phrase “joint supply” describes a product or process that has the potential to provide two or more outputs. Sheep are raised for their meat, milk products, wool, and sheepskin, among other goods.

Is steel a composite demand?

Steel is considered a composite demand. For example, steel may be used for the construction of bicycles, or it could be used for the construction of tanks.

This article has been a guide to what is Composite Demand & its definition. Here, we explain it with examples, a graph, and its differences with joint and derived demand. You may also find some useful articles here –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *