Transport as a derived demand

Transport involves moving goods (freight) and people (passengers) between locations. It is typically a derived demand, meaning it stems from the need for other products or activities rather than being wanted for its own sake.

Reasons why demand for transport is derived:

• Passenger transport - People travel to reach workplaces, enjoy leisure pursuits like holidays, or complete tasks such as shopping.
• Freight transport - Businesses move resources to production sites or deliver finished items to buyers.

Income elasticity and price elasticity of demand for transport

Demand for transport responds to changes in income and price, with varying effects depending on the type of travel.

Income elasticity of demand (YED) for transport

Transport overall has a positive YED, classifying it as a normal good where demand rises as real incomes grow.

However, different modes vary:

• Car and air travel usually show positive YED, with demand increasing alongside income.
• Bus travel often has negative YED, making it an inferior good where demand decreases as incomes rise, as people switch to other options.

Price elasticity of demand (PED) for transport

Demand for transport is somewhat price elastic, meaning price changes can influence usage:

• Higher prices may reduce non-essential trips, like those for leisure.
• Essential travel, such as commuting, is less affected and more price inelastic.
• Over time, sustained price shifts can influence decisions on where to live or set up businesses, impacting overall transport demand.

Cross elasticity of demand between transport modes

Cross elasticity of demand (XED) measures how demand for one mode of transport changes when the price of another mode alters, especially if they are substitutes.

How XED applies to transport:

• Positive XED occurs between suitable alternatives, such as trains and buses for similar routes.
• If the price of one mode falls, demand for the substitute may decrease as users switch.
• However, XED is often low for cars compared to public transport, as alternatives are seen as less convenient.

Factors influencing demand for car travel

Demand for travelling by car is shaped by various economic factors, though it tends to be relatively price inelastic overall due to the high value placed on its flexibility.

Key influences on car travel demand:

• Journey costs - Expenses like fuel affect choices, but low PED means demand does not drop sharply with price rises, as drivers prioritise ease and comfort.
• Income levels - Higher real incomes boost car ownership and use, with economic expansion leading to more road traffic.
• Substitutes - Options like buses or trains exist, and cheaper fares for these could reduce car use, but they are often viewed as poor alternatives, resulting in low XED.
• Complements - Costs of related items, such as vehicle insurance or parking fees, can influence overall demand for driving.

Supply of roads and managing congestion

In the short term, road supply is fixed because building new infrastructure takes time, which can create imbalances with demand.

Short-run supply and excess demand

• Road supply appears as a vertical line on a supply and demand diagram, showing no change in quantity with price variations.
• Demand curves slope downwards, and at peak times, quantity demanded exceeds supply, causing excess demand visible as a horizontal gap on the diagram.
• This excess leads to congestion, particularly during high-traffic periods like rush hours.

Reducing congestion through pricing

• Introducing charges, such as tolls or congestion fees, sets a price that discourages some users and shifts the demand curve leftwards.
• If priced correctly, this matches demand to the fixed supply, easing overcrowding without immediate need for expansion.