Abstract
Demand elasticity is an economic measure of the change in the quantity of a good or service purchased or demanded in relation to the change in the price of the good or service. Transportation companies' services can be viewed as invisible elastic goods when a consumer is choosing between different transportation companies. Therefore, the lower the fares or fees a transportation company charges, the more people will choose it. Also, the higher the number of substitutes, the more price elastic the demand will be for any specific mode of transport, the more sensitive transportation companies are to changes in transportation costs. However, the evaluation of elasticity of demand is complicated and depends on what a transportation company transports. For instance, the demand function for passengers that use road or air transport is a function of population demographics such as age, income, gender, the standard of living, and modal preferences. Thus, demand elasticity affects transportation companies differently.
Introduction
Demand elasticity is an economic measure of the change in the quantity of a good or service purchased or demanded in relation to the change in the price of the good or service. Price elasticity of demand is used to understand and explain how the demand for a good or service changes when there is a change in the price of the good or service. For instance, some services or goods are highly inelastic that if they experience changes in demand or supply, their prices do not change by a significant margin. For instance, people need transportation to travel or go to work around the world. So if oil prices rise and transportation costs increase, people will still buy the same amount of gasoline or always be willing to pay more for transportation. On the other hand, certain services and goods are very elastic that if their prices change, there will be substantial changes in their demand or supply. That said, this paper will delve deeper into how demand elasticity affects transportation companies.
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How Demand Elasticity Affects Transportation Companies
As a general rule, when the price or any service or good increases, the quantity demanded usually falls. However, what is essential is not that the demand for the good or service will fall, but by how much the quantity of the service or good demanded will fall. This provides the answer to the question of the price sensitivity of consumers in the market. For instance, how sensitive are consumers to buying train tickets if the fare was to increase by 3 percent, 6 percent, or even 30 percent? The answer to this question lies in the concept of demand elasticity as it indicates the responsiveness of potential passengers or people to changes in fares.
Transportation companies' services can be viewed as invisible elastic goods when a consumer is choosing between different transportation companies (Paulley, 2016). Therefore, the lower the fares or fees a transportation company charges, the more people will choose it. Also, the higher the number of substitutes, the more price elastic the demand will be for any specific mode, the more sensitive transportation companies are to changes in transportation costs. When transportation companies increase their rates, the orders or demand for their services reduce.
However, when facing customers who do not mind increases in price, the concept of demand elasticity becomes useless. For them, the price elasticity is negligible. Also, the elasticity of demand affects transportation companies in a way that is different from other industries because services cannot be stockpiled or hoarded. Therefore, transportation companies do not clearly understand whether demand will change with changes in prices. For logistics companies, when goods to be transported are in excess to influence logistics and transportation and the long-term business of the company, raising the price can adjust demand in the short-term provided the goods to be transported are elastic, but increasing the price will not change demand in the future, even if it affect demand in the off-season.
As evident above, transport demand and supply have a relationship that is reciprocal but asymmetric (Litman, 2019). While there cannot be demand for transport without a corresponding transport supply level, the supply of transport can exist without a similar demand especially in infrastructure projects that are aimed at fulfilling a capacity of an expected level of demand, which may or may not be realized or may take many years to do so. Schedules transport services such as airlines and public transit provide the supply of transport that runs even when there is insufficient demand. Moreover, transport infrastructure is also often designed at a level of capacity that is higher than the expected demand. This is usually in anticipation of a scenario where demand turns out to be higher.
In other cases, the anticipated demand fails to materialize due to unexpected socio-economic changes or poor planning. The transport capacity is usually higher than the actual demand because the average level of utilization of modes of transport hardly reaches 100 percent. For instance, an underutilized container ship that sails on a shipping route that is characterized by imbalanced container flows, empty truck hauls, and off-peak bus services that are underutilized. Therefore, there is no simple way of measuring demand for transport (Litman, 2019). For this reason, demand elasticity affects transportation companies in different ways.
Conclusion
Demand for transportation is usually expressed at specific times that are linked to social and economic activities. In most cases, the demand for transport is stable and recurrent. In other cases, the demand for transport is uncertain and unstable, which makes it hard for transportation companies to know how changes in prices will affect the demand for their services. Also, transportation demand functions vary depending on the nature of what is to be transported. For instance, the demand function for passengers that use road or air transport is a function of population demographics such as age, income, gender, the standard of living, and modal preferences. For the transportation of freight, demand becomes a function of the importance and nature of economic activities and modal choices. As such, transportation demand for freight is more complex to assess than passengers. Thus, demand elasticity affects transportation companies differently.
References
Litman, T. (2019). Understanding Transport Demands and Elasticities. Journal of Public Policy , 102-127.
Paulley, N. (2016). The demand for public transport: The effects of fares, quality of service, income, and car ownership. Transport Policy , 87-92.
