Classic Transport Demand / Supply Function

Many transport systems behave in accordance with supply and demand, which are influenced by cost variations. 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 costs variations.