Elasticity of demand is the responsiveness of a quantity demanded to a price/income/price of another good change. This concept is hugely used for business purposes and it plays very important role in determining the demand for transport. Transport is a movement of people and goods for personal and business reasons. Now in the UK most of the transport modes are owned by the private sector and firms who own these modes, that is means of transport, use elasticity as one of the most influential concepts when forecasting demand. Firstly, if we look at price elasticity of demand, that is the responsiveness of a quantity demanded to a price change, even if it an estimate and may not reflect the true picture of a situation, it can show whether this or another mean of transport is normal good and demand is elastic or inelastic. If it elastic, for example, as in case of air travel, businesses have to be careful with changing prices and can be sure that with lowering prices they might be able to increase their market share. Low cost airlines in the UK such as EasyJet or Ryanair are good examples of this situation, when they by introducing very low prices in comparison to big and established companies, such as British Airways, could increase their market share and outrun BA in the amount of flights per year. However, in case of private cars, which have relatively inelastic demand, increase in taxes or fuel might not have such a huge effect since private car owners see obvious advantages to travel by car in some cases. But as private cars are considered to be unsustainable mode of transport, government is taking different measures in order to make drivers switch to ‘greener transport’ by making it more integrated, improving the quality of services.
Another type of elasticity of demand – income, which shows how change in income affects demand, also widely used in transport, because by knowing that decrease in income will reduce demand for long haul airtravel, businesses might decide to increase provision for short-haul flights. However, again Income Elasticity of Demand is just an estimate so it might not show correct figure and if businesses will heavily rely on it, they might make wrong decisions and end with market failure.
Cross Elasticity of Demand is another concept of elasticity which shows how change in price for product A will affect the quantity demanded for product B. There are substitute goods that are competing goods and complements which have joint demand. In case of transport, substitutes might be just two different providers of services such as Oxford Bus Services, for example, and Stagecoach. By analyzing the income elasticity of demand they might see whether increase in ticket fares of one provider will lead to a huge decrease in demand for another or whether this change will be insignificant, which will allow to consider that this Bus Company has bigger market share and more successful in the market.
In case of complements, which might be train and bus which provides a service in the nodes of traveling by train, increase in prices for train fares might lead to a decrease in demand for them and therefore less people will demand this bus service. So businesses will be able to know how big effect the change in the price for train has on change in demand for bus.
So, as we can see elasticity of demand plays very important role in transport by helping businesses be aware of the situation in the market and take measures according to it.
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