Demand and Supply - Transport

Question 1

Transport is usually a Derived Demand

Answer 1

1. Transport is the movement of freight and passengers from one place to another.
2. Transport is almost always a derived demand - it usually results from demand for other goods and services:
   - ppl want to get to places for work, leisure activities and holidays, and shopping and other chores.
   - Firms want to bring factors of production together, and bring goods to customers

Question 2

Demand for Transport is Income Elastic and Price Elastic

Answer 2

1. Transport as a whole has a positive income elasticity of demand (YED) - as real incomes increase the demand for transport increases. However, each transport mode also has its own YED.
2. Car and air travel are generally considered to have a positive YED, but bus travel is thought to have a negative YED - bus travel is considered an inferior good
3. Demand for transport is also price elastic to some extent. Ppl might cut back on leisure travel if prices rise, but commuter travel is less likely to be affected
4. There’s some cross elasticity of demand between transport modes that are suitable substitutes for one another

Question 3

The Price Elasticity of Car Travel is Quite Low

Answer 3

1. Demand for car travel depends on several things, for example:
   - The cost of a journey, e.g. petrol - individuals will choose whether or not to drive depending on its cost. However, the price elasticity for travelling by car is low because ppl highly value the convenience and comfort of driving. This means that changes in the cost of driving might not have a large effect on its demand.
   - Income - car ownership and usage rise with real income, so economic growth causes an increase in car usage.
   - Substitutes - there are substitutes to car travel, such as travelling by bus or by train, and a reduction in their prices might reduce car usage. However, these modes of transport are often considered to be poor substitutes for cars, so cross elasticity of demand is low
   - Complements - the price of complementary goods, such as car insurance or parking, can affect the demand for driving.
2. In the short run the supply of roads is fixed (until new ones can be built). This can lead to excess demand during busy periods, i.e. there will be congestion during rush hour.
3. Congestion can be reduced by introducing a price (P on the diagram, e.g. a toll fare or congestion charge) for using the road network. If the price is set at the right level this will reduce demand back to the level of supply.
   * LOOK AT DIAGRAM*