Question

In: Economics

Some products have elastic demands, while other goods have inelastic demands. Typically, the derived demand for...

Some products have elastic demands, while other goods have inelastic demands. Typically, the derived demand for transport follows a similar pattern to the elasticity of the final good, but not always. The share of transportation costs in the final price of the goods may be large or small, regardless of the product’s own demand elasticity, and this can affect the elasticity of the derived demand for transport.

With the aid of an appropriate economic model(s) explain the conditions in which the derived demand for transport would be elastic or inelastic.

Solutions

Expert Solution

Elasticity means the flexibility in demand of the product. it depends on various factors like the availability of substitute goods, change in taste and preferences, change in technology, availability of raw material etc.

Inelasticity means there in no flexibility in the demand of goods. The demand of a good is said to be inelastic when the good is necessity good. For example: salt, sugar etc.

The demand for transportation depends upon close substitute and other factors.

For example: The demand for transportation of container through ship is inelastic because of lack of close substitute.

The demand of transport could be elastic or inelastic:

A). good economic condition: when the economic condition of economy is good, then the demand for transportation is elastic.

B). availability of substitute: when more and more substitute is available for transportation then demand would be elastic. For example: when the companies have substitute of transporting their goods through other mode of transportation.

C). public sector: when the government introduces their transport system the demand of it would increase and demand for other mode of transportation would reduce.

D). entry cost: when the entry cost is low, then more substitute would enter. It would lead to elastic demand for other mode of transportation


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