1. Discuss the concept of transportation demand in relation to derived demand an
ID: 410042 • Letter: 1
Question
1. Discuss the concept of transportation demand in relation to derived demand and its importance in the area of transportation for shippers and carriers. Provide at least two examples. Explain the difference between elastic and inelastic demand. The aggregate demand for transportation service is said to be inelastic while the demand for an individual mode or carrier is often elastic. Explain why this is important to carriers and shippers and why the two concepts are important to transportation demand.
Explanation / Answer
Transportation Demand is the request for moving a specific weight (or amount) of material from one location to another location. The transportation demand is measured in terms of units of weight-distance (e.g. ton-mile) or number-distance (e.g. passengers-miles). For example, if 3 ton of fruits is moved from New York to a 100 miles distant location (irrespective of the route and the number of pickup points), the transportation demand becomes 300 ton-miles. The demand for transportation can arise only when there happens to be a consumption point at a distant place. In other words, the demand for transportation would not have been necessary if the consumption point didn't exist. Therefore, transportation demand is a kind of derived demand which is derived from the related demand of the goods. For example, if cargos are exported to some other country, then the cargo booking will be done only if there is a demand for the goods in the foreign market. Otherwise, the cargo booking will not be necessary.
The price elasticity of demand is defined as the ratio of percent change in demand to the percent change in price. When the percent change in demand is less than the percent change in price, we call it an inelastic demand i.e. demand is not much sensitive to the price change. On the other hand, if the percent change in demand is more than the percent change in price, the demand is elastic i.e. demand is sensitive to price change.
Since transportation demand is a derived demand, it depends on the demand for the goods transported and not much on the price of freight on an aggregate basis. But since a single type of goods may be transported using different modes of transportation, the individual mode's demand remains elastic in nature. In other words, when the freight change of a particular mode (say, road transport) increase, other modes will be preferred over road transport and the demand for road transport will reduce leading to an increase of demand for the other modes. Therefore, the carriers and shippers of road transport will lose out their sales while the aggregate freight of the entire system remaining the same. So, even if the aggregate transportation demand is fairly inelastic, carriers and shippers of specific modes should be careful about their pricing strategy.
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