Introduction
Varying prices affect the decisions consumers make. These decisions on how to spend money and time are constantly being made by consumers and are based on their preferences and knowledge. Each decision is at the margin between different alternatives and can easily be changed by small change in price. For example, if the price of gasoline was to rapidly rise many people may switch to using the transit instead. This is a marginal decision and as consumers choose one alternative over another they experience a trade-off. This report will discuss these trade-offs in relation to transportation, how decisions between modes of transportation vary and the different forms of elasticity that affect demand.
Prices that consumers face represent the marginal cost for using the particular mode of transportation. The marginal cost takes into account all of the factors that influence the consumer’s choice. These factors are usually associated with monetary costs but can also include costs such as discomfort, time or risk. For example, a person will be willing to pay more for an airplane ticket if faster travel time and better comfort is important to that individual. Changes in the marginal cost or price in a particular good will affect its consumption and demand.
It can be said that as prices of a good decline, consumption will increase, and as prices of a good increase, consumption will decrease. This predictable pattern is known as “the law of demand”. Transportation services follow this pattern and are constantly adjusting to meet changing demand. When transportation services reduce time and increase comfort, the amount of usage will increase. When travel costs among transport services rise, the amount of usage will decrease. As technology has steadily increased over the years, it has allowed many transportation services to decrease their travel costs, which make the transport market very competitive.
Elasticity of demand is used to measure...