Thursday 7 January 2010

WITH REFERENCE TO DATA, EXPLAIN HOW AND WHY ECONOMISTS MAKE FORECASTS OF TRANSPORT DEMAND.

Forecast is a future estimate usually based on past information. It is important to make predictions about the demand for transport since transport plays very important role in economic growth. It can be assessed in terms of usefulness of transport in providing services for people and connecting different steps in the supply chain. Economists make forecasts of demand for transport in order to predict how much the provision of transport services is needed and this is sometimes called ‘predict and provide’ approach. Another reason of making forecasts is to know in which parts of roads there will be the highest amount of cars and the biggest congestions might occur. This will help government in taking measures to reduce these congestions before they occur.
In the UK, for example, it was forecasted that by the year 2010 road congestion will increase by 65%, while motorway congestion by 268%. By introducing 25 years plan ‘The Future of Transport’ government is considering to increase the capacity of roads and by reduce congestion.
Also forecast of transport demand can show the effectiveness of introduction of transport policies at both national and local levels. In order to make these forecasts economists have to gather and analyze past statistics of demand and also make other assumptions of population growth, GDP growth, fuel prices and the amount of license holders. For freight transport industrial output and import of goods have also to be assumed.
However, as forecasts are based on past info, they might not reflect the real picture of situation and lead to market and government failure.

OUTLINE THE MAIN SOURCES OF UNCERTAINTY IN TRANSPORT FORECASTS AND EVALUATE THE IMPORTANCE OF TRANSPORT TO THE ECONOMY.

Transport is a movement of people and goods for personal and business reasons. It is widely recognized as central to economic growth. It provides an immediate service to a wide range of productive activities in almost all economic sectors. Since demand for transport is derived demand because it depends upon the final output, that is the destination that people need to get to, it will depend upon people’s aims of travelling.
In the modern world most of the activities of people involve the use of transport and, everyday millions of people use cars, buses, trains to get to work, go to holidays, etc.
Many people usually live far away from the place where they work and therefore they have to use transport every day. And what government has to concern about is how to make easier and faster for people to get to their work. Since private transport is considered to be the most convenient mean of transport, many people use their cars every day to travel to work. When the amount of cars exceeds the capacity of roads, congestions might appear which create a big negative external effect and lead to a reduction in productivity, wasting time of people, which they could use to do some work, and environmental pollution. So there are many measures are being taken in order to reduce this impact by promoting other modes of transport such as buses or trains.
Changes in costs of the use of some modes of transport also play a big role in the economy of the country because if these costs increase, for example, people might decide to save more and reduce consumption in order to be able to afford to use buses everyday to get to work. Also since transport sector accounts for a substantial proportion of employment, it affects the employment levels of the country.
Another sector of economy – government spending is also hugely affected by transport because by introducing different policies, investments and promoting substantial types of transport government increases its spending and so other sectors of the economy might suffer from underinvestment. In such cases when government can’t raise sufficient funds, Private Financial Initiative is being introduced which includes using money from private and public sector with contractual agreement.
Freight transport also has a big impact on the economy because the whole supply chain includes transporting goods from one place to another and so without an integrated and efficient transport, the whole production of services and goods might suffer. Example of congestions also might be suitable here because if goods are moved by truck, congestion might delay delivery of goods to customers or some perishable goods might go off and so companies will make losses.
So as we can see transport plays important role in the economy and increases the welfare of people by providing them access to social facilities.
When economists make forecasts about the demand and supply of transport there might some uncertainties appear such as economic and political shock which has a huge impact on the demand for transport and can’t be predicted sometimes. Also the growth of population difficult to predict and so economists are not sure how many people will get driving licenses. When government introduces transport policies it can’t know for sure how this policy will affect the demand for transport and whether it will change or not.
Also it difficult to predict how income will change and how this change will affect the demand for certain types of transport.

EXPLAIN HOW THE CONCEPT OF ELASTICITY OF DEMAND IS USED IN TRANSPORT.

Elasticity of demand is the responsiveness of a quantity demanded to a price/income/price of another good change. This concept is hugely used for business purposes and it plays very important role in determining the demand for transport. Transport is a movement of people and goods for personal and business reasons. Now in the UK most of the transport modes are owned by the private sector and firms who own these modes, that is means of transport, use elasticity as one of the most influential concepts when forecasting demand. Firstly, if we look at price elasticity of demand, that is the responsiveness of a quantity demanded to a price change, even if it an estimate and may not reflect the true picture of a situation, it can show whether this or another mean of transport is normal good and demand is elastic or inelastic. If it elastic, for example, as in case of air travel, businesses have to be careful with changing prices and can be sure that with lowering prices they might be able to increase their market share. Low cost airlines in the UK such as EasyJet or Ryanair are good examples of this situation, when they by introducing very low prices in comparison to big and established companies, such as British Airways, could increase their market share and outrun BA in the amount of flights per year. However, in case of private cars, which have relatively inelastic demand, increase in taxes or fuel might not have such a huge effect since private car owners see obvious advantages to travel by car in some cases. But as private cars are considered to be unsustainable mode of transport, government is taking different measures in order to make drivers switch to ‘greener transport’ by making it more integrated, improving the quality of services.
Another type of elasticity of demand – income, which shows how change in income affects demand, also widely used in transport, because by knowing that decrease in income will reduce demand for long haul airtravel, businesses might decide to increase provision for short-haul flights. However, again Income Elasticity of Demand is just an estimate so it might not show correct figure and if businesses will heavily rely on it, they might make wrong decisions and end with market failure.
Cross Elasticity of Demand is another concept of elasticity which shows how change in price for product A will affect the quantity demanded for product B. There are substitute goods that are competing goods and complements which have joint demand. In case of transport, substitutes might be just two different providers of services such as Oxford Bus Services, for example, and Stagecoach. By analyzing the income elasticity of demand they might see whether increase in ticket fares of one provider will lead to a huge decrease in demand for another or whether this change will be insignificant, which will allow to consider that this Bus Company has bigger market share and more successful in the market.
In case of complements, which might be train and bus which provides a service in the nodes of traveling by train, increase in prices for train fares might lead to a decrease in demand for them and therefore less people will demand this bus service. So businesses will be able to know how big effect the change in the price for train has on change in demand for bus.
So, as we can see elasticity of demand plays very important role in transport by helping businesses be aware of the situation in the market and take measures according to it.