Classic Transport Demand / Supply Function
Many transport systems behave in accordance with supply
and demand, which are influenced by cost variations.
In line with micro-economic theory, the Law of Demand states
that the demand for transport services decreases when the
price of this service increases. This is reflected in the
transport demand curve which plots the aggregate quantity
of a transport service that consumers are willing to buy
at different prices, holding constant other demand drivers
such as prices of other transport services and goods, the
budget or income and quality aspects such as reliability.
Any change in another factor that affects the consumers'
willingness to pay for the transport service results in
a shift in the demand curve for the good. Exceptionally,
there are possible cases where an increase in price leads
to an increase in demand or, alternatively, where a price
decrease leads to a decrease in demand, so the transport
demand curve does not slope down with quantity (i.e. a perverse
On the above figure the demand curve assumes that
if transport costs are high, demand is low as the consumers
of a transport service (either freight or passengers) are
less likely to use it. If transport costs are low, the demand
would be high as users would get more services for the same
cost. The supply curve behaves inversely. If costs
are high, transport providers would be willing to supply
high quantities of services since high profits are likely
to arise under such circumstances. If costs are low, the
quantity of transport services would be low as many providers
would see little benefits operating at a loss.
The equilibrium point represents a compromise between
what users are willing to pay and what providers are willing
to offer. Under such circumstances, an amount of traffic
T1 would flow at an operating cost C1. If because of an
improvement a larger amount of service is possible for the
same cost (the supply curve moves from S1 to S2), a new
equilibrium will be reached with a quantity of traffic T2
at a price C2. Elasticity refers to the variation
of the demand in accordance to the variation of the price.
The higher it is, the more the traffic in a transport system
is influenced by cost variations.