2. TRANSPORT DEMAND ELASTICITY



ELASTICITY
•Elasticity of demand is the responsiveness of demand to a change in one of its determinants
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•PRICE
•CROSS - PRICE
•INCOME

PRICE ELASTICITY
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Demand curves
Elastic                     Inelastic                       Unitary


Determinants of price elasticity
•The number and closeness of alternative modes of travel (substitutes) •Proportion of disposable
income spent on the mode of travel
•Time dimension

Time dimension



Variability
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Peak and Leisure



Overview



Price elasticity and total revenue
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Q: If operators face inelastic demands, why don't they simply keep increasing the fare?

Exercises
1.Is the price elasticity of demand for airline industry in short-haul markets more or less than
long-haul markets? Why?
2.What are the factors that influence the elasticity of demand for pilots?
3.The price elasticity of demand for Amtrak, the US rail passenger service, among vacation
travellers has been estimated as –1.20. Given that Amtrak faces the market demand for rail
passenger trips, what effect will a 15% increase in fares have upon market demand? What effect will
the fare increase have upon revenues?
4.
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Demand estimations
•According to demand theory, the market demand curve for transportation is downward-sloping.
•You are a transportation economist for rail operator and you are asked to estimate the price
elasticity of demand for rail services. Describe in some detail what steps you would follow to
obtain the price elasticity of demand.
•Suppose that your analysis found that the price elasticity of demand for rail services was  –0.78.
What impact would a 10% increase in price have upon the quantity of rail services demanded? Do you
know whether revenues would rise or fall?
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CROSS PRICE ELASTICITY



Substitutes
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Complements
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Freight
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Passenger
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Public transport
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INCOME ELASTICITY



Time dimension
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Commuting
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Historical income elasticities
•
Fouquet, R. (2012). Trends in income and price elasticities of transport demand (1850–2010). Energy
Policy, 50, 62-71.

Exercise
•Suppose the income elasticity of demand for good is -4. Is this good a normal good or an inferior
good? If it is a normal good, then is it a luxury or a necessity? Why?
1.
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Public transport as an inferior good?
•Public transportation is oftentimes argued to be the inferior good.
1.Identify why this might be so.
2.Is public transportation an inferior good at all levels of income? If so, why; and if not, why
not?
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Free fare policies
•Many cities have recently introduced free fare policies in public transport in order to decrease
car congestion and boost the public transport usage.
•What do you think of such policies?

Rising fuel prices
•With changes in fuel prices what kind of effects should we see in the market for travel?
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EXERCISE 4.3



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