That's problem -- yes, if you spent $X demand would go up, but would it go up enough to justify spending the $X or not? Merely observing that demand would increase in response to a higher quality of service is not an argument, it's just a truism that doesn't provide any new information.
That is why I said elsewhere on this thread that passenger rail needs its own dedicated track. Because the rail we have is so valuable to freight that it's not plausible that passengers or the general public would be willing to pay the price necessary to deprioritize freight. That price is enormous, but it's much more than the price of building out new dedicated rail just for passengers. Go back and redo your argument from the point of view of whether the increased demand would justify building out new track. If that's not the case, there's no hope of it being large enough to justify reducing the focus on freight. I think, in a few places, it is enough to justify laying down dedicated track. But not in all places.