Consumers are often familiar with the basic law of supply and demand: the more customers want a product, the more of that product manufacturers supply. This type of demand is actually one of several types of demand that go into deciding how much of a product to make. Customer demand, or independent demand, is the demand for the end product, while dependent demand is the manufacturer's need to get parts to build the product.
Visibility of Demand
Customer demand typically dictates independent demand, while dependent demand is more internal. For example, customer demand for a new television set is independent demand, while manufacturers' demand for the components used to build each television set is dependent demand. Dependent demand is often invisible to most customers, as they do not see the manufacturing process, but only the end product on the store shelves.
Both the independent and dependent demands affect the economy in general, but companies often base their profit projections mainly off of the amount of independent demand for the product. The dependent demand for the components of a product, however, may figure into how much the company expects to spend to produce the product and the price it ultimately demands of the customer at the end of the process.
The independent demand for a product sets off a chain of dependent demands. For example, if there is independent demand for 5,000 television sets, the retailer must order those sets from his wholesaler. The wholesaler then orders them from the manufacturer, who must then demand the component parts for each set from the people who make those parts. In addition, retailers often base their orders on forecasted demand rather than actual demand and may order a few extra items to account for forecasting errors.
The independent demand is so named because it is the only type of demand that does not need someone else's demand to trigger it. Some analysts may make forecasts about a company's success based on this type of demand. Although dependent demand is invisible to most consumers, it helps drive the economy because manufacturers purchase from one another for production and meeting customer demand.