Demand and Factors that Determine the Demand for Rail Transport Between London and Preston - Assignment Example

?Q1 What is meant by demand? In economics, demand refers to the amount of a good or service that a consumer or a group of consumers have the desire to purchase, have the ability to pay for, and are willing to pay for – during a particular period of time. Usually, the demand of a product depends on several factors like the price of the good, the price of related goods, disposable income of the consumers, tastes/preferences of consumers, and future expectations of price of product and income of the consumers. According to the law of demand, with other factors held constant, generally, the demand decreases/increases with the increase/decrease in price of the good. This relationship between demand and price is plotted on a graph as a “demand curve” as shown in Figure 1. Q2 What factors determine the demand for rail transport between London and Preston? The demand for rail transport between London and Preston depends on the following factors: 1. Price of rail travel between London and Preston: The most important factor that determines demand of this transport is the price of rail ticket to travel between London and Preston. Travelers would compare this price of ticket to cost of using alternative transport. This is important not only for people travelling once in a while but also for frequent travelers. If there exists considerably reduced fare possibility for frequent travelers, the demand could be expected to be higher from these frequent travelers would have lower cost of travel. 2. Time taken by rail travel between London and Preston: Time taken to travel by train is another important factor. If the time taken by train is considerably longer than other means of transport, the demand may be lower for rail travel. 3. Quality of rail service between London and Preston: The quality of service could also be an important factor. It includes not only the quality and comfort of travel by train but also other factors like the frequency of trains, on-time arrival, and the time of departure/arrival of trains. Frequency of trains is important so that if consumer(s) change their itinerary suddenly, if there are alternative trains frequently running, they would not be forced to shift to another means of transport. Next, if the trains are frequently running late, consumers may not find the rail travel very efficient. Also, if the departure and arrival times of trains are not convenient, consumers would not find rail travel very attractive. For example if trains arrive only late at night or if the trains run during the entire length of the day, consumers may be put off. 4. Attractiveness of alternative modes of travel between London and Preston: There could be several other ways consumers to travel between London and Preston. If these services are more attractive, then demand for rail travel would be low. The attractiveness of these alternatives also depends on the relative price of these modes, relative comfort, and other factors. Some of these are discussed below for the three other possible modes of transport a. By car: Several factors could influence the attractiveness of going by car instead. These factors include: fuel price (cost of taking the car), relative length of time taken to drive compared to rail travel, and quality of highways (comfort of ride). b. By air: Factors influencing the relative attractiveness of air travel are: price of air travel, relative total time taken to get from “door to door”, and of quality air transport services. However, there is another important factor here which is the distance of nearest airport from Preston. c. By bus: Factors influencing the relative attractiveness of bus travel are: price of bus tickets, time taken by buses, and the quality of bus services. 5. Day of the week and seasonal effects: The day of the week could be an important factor. For example, if business travel is frequent on this route, then weekends may see a much lower demand. Also, Seasonal effects are likely to significantly influence demand. For example, during Christmas the demand may be higher as people travel around to their homes/reunions. 6. Level of economic activity: Finally, the demand may also depend highly on whether there is significant economic activity between these two places. The higher the level of economic activity, the higher could be the expected demand. Q3 Virgin trains increasing fares On the face of it, it seems that raising fares on this route may not be a very logical solution to their problem of curbing their losses. There are several factors to consider here: a) Virgin Trains operates on several routes. It is possible that some other route(s) and not the London Preston route is the reason for their loss. Therefore, increasing fare on this route may not solve their problem. It may actually worsen the problem if the demand for this route falls much more in proportion to the price. b) The loss could be coming more due to their inefficiency of operation and not necessarily due to demand. If their operating cost is high, increasing fares will still not cut those costs and may not solve their problem. c) Finally, increasing fares is no guarantee that their revenue will also increase proportionally. As shown in Figure 1 below, the demand for their rail travel on this route would decrease if they increased their fares. Since revenue is the product of price per ticket and the number of travelers, increasing the fares may not change their revenue by much, unless the demand for their route is inelastic for price, which is not the case for rail travel (Jones, Cubbin, & Metcalfe). As an illustration, in figure 1, Let us say that they are currently operating at price P2 and the demand is Q2. If they increase their price to P1, the demand for their service would be expected to drop to Q1. Their revenue (R) = Price of ticket (P) x number of travelers (Q) Also, P1Q1 is nearly equal to P2Q2. Therefore increasing the price from P2 to P1 will not change their revenue and their problem of operating loss will still not be solved. Thus, the decision to increase the rail fares is not logical. Figure 1: Demand curve for Virgin Trains References Jones, I., Cubbin, J., & Metcalfe, P., 2006. The demand for longer distance rail travel in great britain: some new evidence. London: London School of Economics. Virgin Trains, 2011. Our routes & stations. Retrieved October 31, 2011, from http://www.virgintrains.co.uk/routes-stations/ William, B., & Melvin, M., 2010. Economics. Eigth Edition. South-Western College Publishing. Read More