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Demand Definition
Demand is the amount of a good, service or resource that people are willing to buy at a certain price at a given moment in time. The demand curve slopes downwards; this is one of the economic laws known as the law of demand. The law of demand is the inverse relationship between price and quantity demanded such that, if the price of a good increase, the quantity demanded will decrease. Conversely, if the price of good decreases the quantity demanded will increase (O’Connor, 2004).
Factors Determining the Demand for Rail Transport in the UK
Change in overall demand for goods is subject to other factors called determinants of demand. Basically, change in one or more of the determinants causes buyers to want more or less of a good at each and every price. Generally, demand is influenced by six factors, which include “tastes and preferences, income level, market size, price of substitute, price of complementary goods and expectations” (Tucker, 2010). A change in any one of these factors forces demand curve to shift either to the right or left depending on the direction of change in the factor. Importantly, the resulting demand curve represents the new reality of the market place.
In Europe, many commuters in rail transport are perplexed at the fact that raised fares poorly reflect on services offered by the existing rail companies. Due to this reason, commuters are now looking for work nearer to their hometowns or moving closer to their work to reduce their spending on fare. Although intentions of the increase seem noble, many commuters find it untimely due to the economic crisis, which has also led to employment lapses (Tucker, 2010).
Generally, income level and demand for goods and services are directly related such that a change in income will result in a proportionately equal change in demand. Therefore, with the cost of living tending to increase while income levels of many commuters staying stagnant or slightly increasing at a disproportionate rate with inflation demand for rail transport tends to decline. This has led to commuters changing their jobs as their salary is all wasted on rail transport. Rail transport is efficient and effective and eco friendly to the environment but with rising prices commuters may try to find other options (Tucker, 2010).
The number of commuters is increasing, thus demanding more services from rail transporters; this has, in turn, increased its demand. This implies that, with the increasing numbers, rail transport must be wary and ready to serve all customers equally by increasing the supply of their services. This means that more staff will be needed to ensure the safety of trains, cleanliness and ticket cutting. If demand decreases, it will drastically affect the revenues received (O’Connor, 2004). With the increase in demand for rail transport, more commuters are looking into other options. Price of substitutes such as buses, cars and bicycles are some of the options in the UK. Most commuters find that the price of using a car versus rail transport shows some similarity. Commuters thus prefer to use cars in commuting other than rail. Another determinant is an expectation; optimistic views of prosperity in the rail industry increase demand while pessimistic views decrease the demand. If citizens of the UK find the project beneficial, then the demand for better rail infrastructure will be high. This will mean that more investors will take part to improve and help to speed up the process (Tucker, 2010).
Price Elasticity of Demand
Price elasticity of demand is a measure of how much quantity demanded responds to changes in price. Demand for a good is said to be inelastic if the quantity demanded responds slightly to the changes in price while demand is said to be elastic if the quantity demanded responds substantially to changes in price. Price elasticity of demand is calculated as percentage change in the quantity demanded divided by the percentage change in price (Mankiw, 2014).
Increasing Fares to Raise Revenue to Fund Rail Investment
Availability of other substitutes may force commuters to change their mode of transport and turn to cheaper transportation. This will highly influence the number of commuters in rail industry, thus decreasing revenues. A decrease in revenue will leave the government with no money to invest in the rail system. Rail transport is a necessity for many commuters; for instance, unlike car journeys that take longer time, rail transport provides faster services (Landsburg, 2011). Therefore, the number of commuter may change slightly, making the demand inelastic. The government will therefore be able to fund rail system with revenues received. Time horizon as a factor of price elasticity indicates that, commuters will continue using trains and may also substitute with other options thus continuing to provide revenue that will help the government to invest on rail transport system. Although price elasticity cannot be directly measured, all the above determinants can, in one way or the other, help to quantify its relevance in the economy (Landsburg, 2011).
Reference List
Landsburg, S 2011, Price Theory and Applications,Cengage Learning, OH. Web.
Mankiw, N 2014, Principles of Economics, Cengage Learning, OH. Web.
O’Connor, D E 2004, The Basics of Economics, Greenwood Publishing Group, CT. Web.
Tucker, I 2010, Macroeconomics for Today, Cengage Learning, OH. Web.
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