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Unit 2: Demand Analysis

cannot be stored. An unsold product can remain on the shelf of a store until a customer buys Notes
it (often with discount incentives), but an unsold seat on a flight or unused cargo capacity

in the same flight remain unsold and cannot be brought back as additional capacity later.

In this case an opportunity has been missed since the amount of transport being offered has
exceeded the demand for it. The derived demand of transportation is often very diffi cult
to reconcile with an equivalent supply and actually transport companies would prefer to
have some additional capacity to accommodate unforeseen demand (often at much higher
prices). There are two major types of derived transport demand:
Direct derived demand: This refers to movements that are directly the outcome of economic
activities, without which they would not take place. For instance, work-related activities
commonly involve commuting between the place of residence and the workplace. There is
a supply of work in one location (residence) and a demand of labor in another (workplace),
transportation (commuting) being directly derived from this relationship. For freight
transportation, all the components of a supply chain require movements of raw materials,

parts and finished products on modes such as trucks, rail or containerships. Thus,
transportation is directly the outcome of the functions of production and consumption.
Indirect derived demand: Considers movements created by the requirements of other
movements. The most obvious example is energy where fuel consumption from
transportation activities must be supplied by an energy production system requiring
movements from zones of extraction, to refineries and storage facilities and, fi nally, to

places of consumption. Warehousing can also be labeled as an indirect derived demand
since it is a non movement of a freight element. Warehousing exists because it is virtually
impossible to move commodities instantly from where they are produced to where they
are consumed.
Transportation can also be perceived as an induced (or latent) demand which represents a
demand response to a reduction in the price of a commodity. This is particularly the case
in the context where the addition of transport infrastructures results in traffi c increases
due to higher levels of accessibility. Roadway congestion is partially the outcome of
induced transport demand as additional road capacity results in mode shifts, route shifts,
redistribution of trips, generation of new trips, and land use changes that create new trips
as well as longer trips. However, the induced demand process does not always take place.
For instance, additional terminal capacity does not necessarily guarantee additional traffi c

as freight forwarders are free to select terminals they transit their traffic through, such as it
is the case for maritime shipping.
Source: http://people.hofstra.edu/geotrans/eng/ch1en/conc1en/deriveddemand.html
2.2 Law of Demand

The Law of demand explains the functional relationship between price of a commodity and the
quantity demanded of the commodity. It is observed that the price and the demand are inversely
related which means that the two move in the opposite direction. An increase in the price leads to
a fall in quantity demanded and vice versa. This relationship can be stated as “Other things being
equal, the demand for a commodity varies inversely as the price”.

Example: Ram is demanding a motorbike manufactured by Company A. Now, if
Company A increases the price of the bike substantially, say by 10% , then Ram might change his
mind and decide to buy motorbike from company B whose price is lesser or he might postpone
his demand altogether.

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