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 demand curve).
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.