TRANSPORTATION DEMAND ANALYSISMcGraw-Hill Series in Transportation Consulting Editor Edward K, Morlok, University of Pennsylvania Dickey: Metropolitan Transportation Planning Drews Traffic Flow Theory and Control Hennes and Ekse: Fundamentals of Transportation Engineering Horonjelf and MeKetvey: Planning and Design of Airpors Hutchinson: Principles of Urban Transport Systems Planning rransportation Demand Analysis Introduction to Transportation Engineering and Planning ‘Quinn: Design and Consirucion of Ports and Marine Structures TRANSPORTATION DEMAND ANALYS: Adib Kanafani University of California, Berkeley McGraw-Hill Book Company New York St Lauis San Francisco Auckland Roget Hambure “ettamesbus London Madrid Mexico Menueal New Delhi Panama Paris Si0 Paulo Singapore Sydney Tokyo. Toronto“This book was stn Times Roman by Benj. H. Tye The eters were lienne V. Brown, Kiran Verma, and Swan Halt, the poduction superizr was John Marcia. ‘The drawings wete done by ANCOBoston Taliay Lithograph Corporation wos peer a bide. [TRANSPORTATION DEMAND ANALYSIS copyright © 1983 by MeGrow-Hil, ne. Al righis reseed Proved in the United Sos of America, Except a permite ner the Unie States Copyrigt Act of 1976, no put of this publication may be FRpvoduced or dist in ary form or by any means, or tre in a data base imcseval system, wit the pie writen permission ofthe pls 1234567890 HALHAL 89876543 ISBN 0-07-033271-1 Library of Congres Cat Kanafai, Adib K. “Tawsporation demand seas Includes biographies and index. 1 Trensporationplapsig. -7-Demand (Economie theo) 1 Tie HEIS25.K36 1989 380.5068 82413015 ISBN 007-033271-1 ng in Publication Data eee CONTENTS EE Chapter Chapter 2 24 22 23 Chapter 3 31 Chapter 4 4a 42 43 4a 4s Preface Introduction “The Demand for Transportation “Transportation Demand Analysis References Demand Theory “The Demand for Transporation Microeconoinie Demand Theory “Applicaton of Demand Theory to Transportation Problems References Transportation Supply Framework for Supply Analysis Costs and Cost Functions “The Supply Function Selected Transportation Supply Functions Problems” References Urban Passenger Travel Demand Demand Analysis in Urban Transportation Planning Framework for Demand Analysis undamentals of Urban Travel Demand Analysis “Approaches to Urban Travel Demand Modeling Urban Trip Generation Summary Problems References na ua utChapter 5 3a 52 33 54 35 56 Chapter 6 6a 62 63 6a 65 66 67 68 Chapter 7 a 1 Chapter 8 om 82 Chapter 9 9 92 93 oa 95 Analysis of Travel Choice Measurement of Choice “The Probit Model ‘The Logit Model Sequencing Stochastic Choice ‘Choiee Fonctions and Demand Functions Calibration of Choice Models Problems| References Trip Distribution Analy: ‘Tip Distribution in Urban Travel Demand Analysis Fundamentals of Trip Distribution Analysis Demand Models of Trip Distribution ‘Choice Models of Trp Distribution Physical Models of Spatial Interaction ‘Choice of Socioeconomic Variables Choice of Transport Supply Variables Calibration of Trip Dstibution Models Problems References Mode and Route Choice Mode Choice Route Choice Summary Problems References Intercity Passenger Travel Demand Charetrisis of ttercity Travel Demand Approaches to Iniecity Demand Analysis Summary References ‘The Demand for Air Transportation Measuce of Air Travel Activity ‘Approaches to Demand Analysis Macroanalysis of Air Travel Demand Microanalysis of Air Travel Demand nultaneous Models of Demand and Supply Problems References 19 120 124 129 Bs 17 19 8 150 133, 153, 154 139 161 164 m3 13 176 1s 187 19 190 203 212 213 216 219 219 psa} 23 22 233 24 236 2m 255 270 ns 26 Chapter 10 vo 02 103 104 Commodity Transport Demand [Approsehes to Demand Analysis Microeconomic Analysis of Commodity Flow Spatial Interaction Models of Commodity Flow ‘Macroeconomic Models of Commodity Transportation Problems References Index cconens vil 29 20 281 295 300 3B 31a 317ee PREFACE a ‘Demand analysis is one subject that occupies a prominent place jn the trans: portation erature. However, much ofthe material on this tpic ito be found Frepersed throughout the Ktefture on broader topics such as transportation pl Sing, Thus, inspite of the abundance of material writen inthis field, the absenes rine. dsofidated book on this subject has left transportation demand analysis Sih lite recognition as a field of study by itself, quite aside from having wondered teaching and researching it cumbersome. For 2 number of years have Tait the need for a single text that would encompass the whole topic of demand alysis and that would present it within-a meaningful framework, This book arto do thal, It is also intended for the professional who is interested in transportation planning and some aspects of engineering Me book is written primarily as a textbook fora first-year graduate program in wansportation or related fields such as city and regional planning and ceo" ve aanis It is also meant to serve as a source pool for users of transportation Temand analysis by providing the theoretical and methodological information speed for the practicing analyst to apply the more practical tools ofthe trade, Mich as packaged computer programs and analysis systems. Having attempted 10 include the latest developments in the field, I feel that the book can serve a5 2 are rcnce forthe researcher interested in exploring different means of improving the state of the art. This book is organized in a unique way. Chapters follow a concepts! framework that underlies the work, reflecting the author's suggestions fr @ aarrey outline, Demand analysis as an exploratory analysis that aims at explain- {travel or shipping behavior within a given paradigm fishes the framework “Ths paradigm is that of microeconomie demand and supply theory but funda aan alterations to that theory are essential for ts applications to transportation The scope includes passenger and commodity traqsporation, and the Beograph- abl context is divided into urban-and interurban settings. Chapter 2 introduces = ‘Pick but intentionally thorough overview of microeconomic demand theory. It ®1X PREFACE. is presented in general terms since specific references to transportation appear in the rest of the text. Chapter 3 follows with an introduction of the concepts of supply. Here the discussion is specific to transportation. Regardless of wh particular interests the reader has within the field of transportation demand analy- sis, Chapters 2 and 3 should be read before subsequent chapters. Chapter 4 introduces the principal concepts of urban passenger transportation demand. Itis, 1 basic chapter, one which should be read before Chapters 6 and 7, which deal ‘with specific methods of travel analysis that are common in the urban passenger cease, Special attention is given to choice analysis, with Chapter 5 devoted to the subject, Choice analysis is important in all aspects of demand analysis although itis predominant in the urban passenger case. Chapter 5 covers more than Chapter 4, specifically for urban applications. For the reader who is not quantitatively inclined, oF for situations in which the instructor finds that the class lacks ade~ quate preparation in probability and statistics, it would be appropriate to follow the sequence of Chapters 4,6, and 7 for covering urban passenger transportation. Again, the material in Chapters 6 and 7 that deals with trip distribution and mode nd route choice applies to urban as well as nonurban travel. However, since most (of the developments in these areas have been through urban travel analysis, the material is presented as a part ofthe urban sequence of chapters. The reader of Chapters 8 theough 10 will find applications of these methods to interurban travel ‘of both passengers and commodities. The conventional sequence of models used in urban travel analysis—trip generation, distribution, mode choice, and route ‘choice—is presented in Chapter 4 as one of the approaches to urban travel analysis, Less emphasis is placed on trip generation than on the other methods, since it does not follow the overall conceptual framework of choice and utility ‘maximization that results from adopting a microeconomic demand theory logic. ‘The nonueban chapters of the book deal with passenger travel and com- ‘modity transportation. Chapter 8 introduces the principal ideas of intercity travel demand analysis and serves as preface to the more detailed Chapter 9, which deals specifically with air transportation. This was done for two reasons. Fist, _more work has been done in air transportation demand analysis than for any other type of intercity travel and second, the methods and models presented in Chapter 9.can be used as an example of what might be done in other modal contexts. The instructor interested in doing this can supplement the material with notes on specific applications of demand analysis to other modes of travel. Finally, Chap- ter 10 provides the principal ideas and methods of commodity flow analysis. It presents both a microeconomic framework using the shipper as an analysis unit, and a macroeconomic one based on inerindustry analysis extended to the multi- regional dimension. Ina course in which thee is litle or no emphasis on urban travel, a sequence of readings might be as follows: Chapters 1, 2, 3, 8, 9, and 10, with Chapter 5 added if there is interest in stochastic choice modeling, and with Chapter 7 included if there is interest in network flows and assignments. PREFACE x ven though an tempt hasbeen made até the text complet, sah is usually sviaully inpssble tsk The references atthe ends of chapters ae Made ts give the sadent additonal information. Considerable xb i reir te he tarctorin presenting the material, While have presented pechaps easier ily my own para for demand analysis, the insractorean ether ronan preset what here ous ony asa backdrop for presenting oF her own approach. Since is prbably impossible for me to extend acknowledgments t all those tke have helped re wth is writing endeavor, which has now taken & ses cro yews Tail attempt to mention oly tose who have ha the strongest rameece oun thinking of the subject and on my productivity in wting about ie Sines tnve taught his materia or over a decade now, both atthe Univesity A Caloris at eeley and atthe Universidad de Los Andes in Merida, Yenc itt be sada witout doubt, the scores of students of mine who ree managed to lear the subject fom nfnished drafts deserve a tof rei Te priate can single ot the stents ofthe pst wo years who have been raeftpfl npg oot errs and inspiring wring improvements inthe Gal Ten athe exe My collegues at the Isat of Tansporain Stale have cresegtenddwisble advge and encouragement: Geffcy Gosling, Evard Sutison and Carlos Dango all ead and commented on ear drafts of parts Sri Book, My teaching asians have also been very hepfl in suggesting a ett dnd composing exercise problens: Greig Harvey, Redha Beh- reece Hoy Shin Yuan, and Att Ghobri all worked with me on teaching the vera to te aes hat preceded this book. My friend Richard de Nefville rie Mancha nut of Technology rea cris dats and provided iroahubte support and encouragement daring the eal phases of my waiting Beate Besclrand Syvia Ader ped the manuscript and often improved my Potnth conidersbly, Tepper the Institute of Transporation tudes of he Unicity of Cafia at Bentley was important fr the completion ofthis oj pes Finally, all the members of my family contributed to this writing project in many ore ys ink. Toll of them 1 ve my Braid. Most ofa, Pat ny wits Karn mo pt up vith years of nseed ambiance created a ual ote projet hat had ot yet ben completed. Without he, hit work Aa have ever been done, nor Would it have Been inspired. U dedicate this oto her therfore, only asa pat of he gratitude that | wish 1 give. ‘Adib KanafoniDEMAND ANALYSIS TRANSPORTATIONee CHAPTER ONE ee INTRODUCTION “The need for transportation stems from the interaction among social and eco- nomic activities dispersed in space. The diversity of these activities and the ‘complexity of their pattems of interaction result in numerous determinants of transportation needs. The reasons people need to travel are endless; they range from the indispensable quest for food and shelter to the voluntary exercise of mobility for its own recreational value. Commodities are also shipped from place to place for a myriad of reasons, stemming from the economic necessities ff production and consumption and from the pursuit of eeonomic advantage and gain, ‘This diversity of patterns of socioeconomic interaction and the resulting complexity in the evolution of transportation needs indicate that formal and syStematic analyses are essential for understanding the relationships between the spatial distribution of activities and transportation. This is the main objective of transportation demand analysis, and the topic of the following chapters "The motivation for transportation demand analysis is indeed strong, for its is an essential activity in transportation planning. It provides a framework for estimating the needs for transportation and for forecasting the volumes of traffic that will use transportation facilities. This Forecasting is essential for the design of transportation facilities and for the evaluation of their economic feasibility ‘The rest of this chapter is devoted to a discussion of the concept of demand {for transportation and tothe definition of transportation demand analysis and its role in transportation systems planning.22 TRANSFORTATION DEMAND ANALYSIS 1.1 THE DEMAND FOR TRANSPORTATION -the frst stp inthe study ofthe relationship between socioeconomic activins ro te prtaion needs isto adopt a meaningful measure of these ness. Te and ansPorportation is manifested inthe form of aie volume, whethe i Terow of automobiles on a foad, passengers on a flight, or tons of M>N 25) ‘In moving within the field fom a point in the lower left-hand quairant, such as to a point in the upper right-hand quadrant, such as P, one would then be wr ving froma point inferior to M to a point superior tot. Somewhere along tis Fath, then, there must be a point such as M’ which is equivalent to M. Such 9 peint would representa combination of goods X and ¥ that is neither istered po nor inferior o it. At this point we say that the consumer is indifferent Keaueen the two choices, in the sense that the consumer considers these two poms completly exchangeable in all respects, Tracing the tous ofa foc Prins in the consumption eld (X,Y) results ina line refered to asthe indier- Pnce curve. Such a curve is shown as curve J in Fig. 2.5 DEMAND THEORY 19 F Figure 2.5 Indiffreace curve beeen goods X and. ‘What the indifference curve shows, then, ate all the combinations of X and Y among which the consumer is indifferent. In other words any two points along curve / in Fig. 2.5, such as points A and B, will lead to exactly the same utility to the consumer. It is also useful to think of the indifference curve as the trace of three- dimensional function U(z, y) which gives the utility of consumption in terms of the quantities of goods X and ¥. Any one indifference curve would represent the projection onthe consumption field ofa given value of U. The indifference curve is thus referred to also as an isoutlity curve. For goods of which more is always better or at least as good as less, the indifference curve would always be convex to the origin inthe consumption field Consequently, it would also follow that indifference curves will not cross. A ‘consumption field on which a number of indifference curves are shown would then look as shown in Fig. 2.6, The farther from the origin an indifference curve js, the larger isthe utility implied, Thus curves /), 12, .. . . Ie have the following preference relationship: gore 2.6 4 consumer’ inference sap. hohe bh 2.6) ‘Such a representation is referred to as an indifference, or uilty, map, and describes completely the preference structure ofthe consumer with respect ro the| | 20 TRANSPORTATION DEMAND ANALYSIS seine to atta one go for aoe cose, for example, care angina rate of subatinsin and has the interpretation a8 the nomberof emits of wey en We By no” auntie Bey oo an wie ges aun on aUlay ~~ ay which says thatthe marginal rate of substitution between two goods is equal 10 which 395 targa ue. The margin! uty of a good isthe rate of a ange of tility with the quantity consumed of that good. Since the assumption Sear gabilty implies that the marginal utility of any good is always non- sfegative, the result in Eq. (2.9) implies that the marginal rate of substtsion is peettive, which is expected since the consumer will always give up some of one food for some ofthe other but never both atthe same time: will be useful to extend this example to the general ease where there are sn goods X, = In 2, ---. The consumption ulity fonetion UC) is now fan n-dimensional function ue) eas yo oe Ke) “the indifference map in this ease i a map in an n-dimensional space Sin which carvoint i defined bythe consumption vectot X = (x,t «Se: Fora Sy Revet of uity U(X) = Uo, th ocus of al pins X dines an iniferene vee ere abich Eq, (2-9 als holds for every pair of commodities. Tose his Consider that at UX) = Uo, a constant, auqe) = avy =0 ap 2.10) Holding ll x fixed except to, say tm and then ey SW ey + an 0 Ma + Shae which is the same as the result in Eq. (2.9) DEMAND THEORY 21 It is important to note that the utility function is assumed to have certain regularity properties, including differentiablity at all points. In particular, the assumption of insatiablity implies that @U/ax = 0 for all i, In addition itis normally assumed that the second derivatives of U, d°U/ax; Ary exist and are ‘continuous for all and k, The second derivative may have any sign, although a common assumption is that it is negative, implying that marginal utility from consumption is decreasing. Choice under a budget constraint The choice of a consumption pattern is not solely determined by the indifference map of a consumer. Indeed, if this were the cease, then the assumption of insatability would imply infinite consumption ofall ‘z00ds under consideration, The choice is normally constrained by a number of limitations on the resources required for the consumption activity. Most im- portant of these are the budget constraints that limit the amount of money a Consumer can, or wll, allocate toa group of goods. Other imitations include the time available and in some cases the space available. It is common to consider the monetary budget constraints only in microeconomic demand theory, since these are usually the most critical ones. In applying the theory to transportation other constraints become important and cannot be ignored, for example, the time spent in transportation is usually limited and its Timitations affect travel demand. [AS we shall see further on, time can be either considered by itself or incorporated into monetary budget constraints by transforming it into money terms using the concept of the value of travel time. "Assuming that all prevailing limitations can be represented by the monetary ‘budget constraint for the purpose of exposition, we can look at the process by ‘which the consumer chooses a consumption pattern. Given a vector of unit costs P= {pi,p2, - .- » Pub which represents for each good the cost of atquiring one unit, and given a total budget thatthe consumer can or will allocate to the group ‘of goods in question, only consumption vectors that satisfy xp 5B or |= PX=B (2.12) ccan be chosen. In other words, the otal amount of money spent on a consumption ‘vector X cannot exceed the budget B. If we consider the n-dimensional prefer- cence space ©, then wean see that Eq. (2.12) divides this space into two regions, ‘one feasible region where choice can accur and one infeasible region where the budget constraint prohibits choice. The insatiability assumption implies that in corder to maximize the utility of consumption, the consumer needs to maximize consumption itself. Since the utility function is assumed to be continuous and differentiable with respect to all x, it follows that the consumer will choose @ vector X" for which Eq. (2.12) becomes Bap=a en22 TRANSPORTATION DEMAND ANALYSIS Depending onthe exact shape ofthe U funtion, there may B® om more such eerectre. In genera wi the assumption of astretly convex oy function Meee implied assumption of constant niteoss there is @unine So a Yvmeets the condition of Bq. (213). This vector s referred 10 98 the optimal vonsmption vector, which represents the actual consumer choice implied by all the assumptions made so far regarding consumer behavior Treat the same reslt ina more formal way we restate the Oat peincpt of consumer choice under a bdget constraint Tone vector Pood fom which a consumer isto chose, a wit function U(X), and given aaa stunt costs P and a budget B, te consumer will chose Bet Yeicy of 2 eA ich wil maximize UX) sabe! we cong P= PTS Bead Formulation of ths penile so const a Tgrangan L: Le Ulery se DAE Pa a1) here Aisa Lagrange miller. The derivatives of Z must vanish at X¢, sothat au 7 12, @.15) whieh implies that fora consumption vector X tobe optimal from Ihe consumer's point of view, it should satisfy the relationship Demy poe 2.16) ax, forany good for which a nonzero consumption quantity 2 exists, This To that tor el be made in such 2 way that the marginal wilt of <2 good is, proportional its unit cst. This relationship can slso be ‘translated by dividing Bi (2.16) for one good iby the same equation for another good k: ayian _ Bt MUIR = Be fora and k en Recognizing the lefthand sie of Ea. (2.17) a the ratio of margin wlities Recognng (9) is equal vibe marina rate of substitution, the (owing eheral result is obtained: the optimal consumption vecior Of 8 Sorte is Fee sy that the marginal ae of subsiion between any pir of BOM © tequal to the ratio oftheir unit costs. ae ete thi result i a more conerete way, we Fevet back 1 Oe two-good example. Consider a consumer ina situation where here 6 only two wrod Ry and Xa. A uility function UCan 22) can, 8 Pefore, be traced by Boos da gues as on Fig. 2.5. Let teat cost west P = (Pu P3) Proce sai sts of goods Xi and Xo, respectively. Note that the use of Ne Aa ena is because in most caes in consumption analysis these wnt cove P for i gun are the prices af the respective goods. We are using Ihe erm ct 10 pe an pice in ordet to permit a generalization which is important 8 the pplication to transportation, as we shall see Tater on DeMAND THEORY 23, a z Figure 2.7 A budge le with fied wit rcs IF tne consumer has a budget B allocated to these two commodities, then the optimal choice would be made in sucha way that pi + pata ~ B. This budget entaint can be shown papillon an indiference map ain Fig. 2.7. STs with intercepts B/py and Bp, respectively, shoving the quantities that 2 iTy be obtained if the whole budget were spent on X; and X. Thus, the line, could on ne ata slope whichis xa ote ato ofthe pices Tap it dvides the indiference region into two subregions, one tothe upper Fight Pu ch isthe infeasible or unaffordable region, and the ater tothe lower lft se! Which i the feasible or affordable region. If we naw combine the indie SASS map of Fig. 2.6 with the budge line of Fig. 2.7 as shown in Fig. 28, then aoe see the graphic interpretation ofthe optimality conditions of Eq. (2.17). Figure 2.8 Optinal consumption patter wih %1we goods Figure 2.8 shows that / is the highest indifference curve that can be reached ‘without leaving the feasible budget region. It can also be seen that any point on"24 TRANSPORTATION DEMAND ANALYSIS that indifference curve other than its tangency point with the budget line will fall Inthe infeasible region and will imply a total consumption cost that exeeeds the budget. This tangency poitit M represents the optimal consumption choice {ar 2)) that is represented by indifference curve 1 ‘Changes in income and in price Ifthe income ofthe consumer increases so that itis possible to augment the amount B, then changes will occur in the optimal Consumption patiem. An increase in the budget, say from B 10 2” as shown on Fig, 29, will result ina shift of the budget line without a change in is slope, as BR. Figure 29 Increase in income on budget Jong asthe unit costs remain unchanged, In general, such an inerease will result in changes in all quantities x, but the direction of such changes cannot be dletermined a priori without knowledge ofthe indifference map. Two situations ‘canbe illustrated using the two-good example, These are shown in Figs. 2.10 and Figure 2.10 Income effect with two nonmal oats. 2.11. In the first situation (Fig. 2.10) an increase in the budget from B to B” results inan inerease in the quantities of both goods, as indicated by the displace Trent of the optimality point from M(x, x2) to M'(xi, x8). With the inereased DEMAND THEORY 25 budget the consumer can afford a higher utlity level, as indicated by the shift from indifference curve 1; to fz. In the second situation (Fig. 2.11) the same Figure 2.11 Income effect with one terion % god, increase in budget results in an increase in the quantity consumed of goods X2 but a decrease in the quantity of Xj. This is shown by the displacement from M (x1, x) to M (x, x2), where x less than x, and is obviously the result of the shapes of the indifference curves in this case. From the slope of these curves it can be seen thatthe marginal utility of good X is considerably higher than that of X; and that along any one indifference curve, the consumer would give up a considerable ‘amount of X; in retum for a relatively small amount of Xp. In such a case, itis teustomary to refer to X; as an inferior goad and to Xp a8 a normal good. This definition is only relevant when comparing goods and is a measure of the relative marginal utilities. As we shall se later on, a more general definition of inferior tnd normal goods is based on the so-called income elasticities of the demand It-should come as no surprise thatthe consumption of some goods might decreas ifthe income of the consumer increases. This is particularly relevant in transportation demand analysis when dealing with the demand for bus trans~ portation as an alternative to auto transportation. Inthe example of Fig. 2.11, X1 ould very well represent the number of bus trips made by a consumer during & given period of time and X, the numberof auto trips. Its common for people to reduce their utilization of public transportation nd increase their private auto use as their incomes increase. If the consumer's income and budget remain unchanged but the prices of the ‘commodities do change in such a way that their relative values remain the same, then an effect exactly similar to that of income change will take place. This can easily be seen by considering the two-good example. Ifthe prices of X; and Xe change in the same proportion, then their relative values will remain the same. ‘This means thatthe price ratio, which is the slope of the budget line, will not change. What will change are the intercept points B/p, and B/p2, giving the same effect as that shown in Fig. 2.9.226-TRANSFORTATION DEMAND ANALYSIS If the price of only one good changes while that ofthe other remains the samme dn he effect that takes pace willbe diferent from the previous case- TH ge in one price wil alter the eave prices ofthe goods in question, sree 2 12, te slope ofthe budget line changes, withthe iterceps point 2/Py increasing as py declines. x 5 _— igure 242 Effect on budget ie of price EEE & * oon “the effect of sucha price change on the consumption pattern ca, be NS, trated bythe diagram in Fig. 2.13. As the price X; falls, the budget ine BS rrsies pare 2.13 The combination of Freome and subetiuton effects ye Xy axis. The to RS’, where 5” represents the new, higher intercept point on the 1 ‘Seeceace in price thus shifts the budget lin wo the left and enables the consumes DEMAND THEORY 27 to achieve a higher utility level, as indicated by the shift of the optimal con- ‘sumption point M on indifference curve Ito M on indifference curve. 1’. This Mnovement from M toM’ implies thatthe consumption of at least one of the goods increases, but not necessarily of both. To see why this is the case, we consider resolving the movement from M to into two components. The first component is represented by shifting the budget line to RS", which has the same slope as the line RS", thus incorporating the effect of the change of price but which is tangent to the First indifference curve /. The second component is obtained by shifting the new line R’S” parallel to iself up to RS". The first component would esult from compensating the decrease in the price of Xy in such a way as to keep ttie consumer on the same indifference curve I, the implication being that the ‘compensation will eave the consumer with the same purchasing power. The tffect ofthis compsnent isto mave the consumption point from M to M”, clearly indicating a shift from X; to X1. This is referred to as the substitution effect, which always results in an increase in the consumption of the good whose price has allen relatively. The second component is a translation of the budget line from RS" to RS", which is equivalent to an increase in income. The effect of this shift, referred to asthe income effect, i to mave the consumption point from M” to M ‘Whether this will result in an increase in the consumption of one or both of the ‘goods depends on their relative utilities and can be determined as in Figs. 2.10 tnd 2.11 In this particular case the shift from” to-M "causes an increase in both ‘x and x, implying that both goods are normal. iin Fig. 2-14a and b is shown 2 situation where good X; is inferior, and ‘consequently the income effect results in a decrease in x1. Two conditions can Figure 2.Ma The cae ofan inferior gp (3) Income effect sar than substation effect228 TRANSPORTATION DEMAND ANALYSIS Figure 2.140 The case of an infsor gd. (Subsite mar han aco. arise here. The first, in Fig. 2.14a, is when the substitution effect is larger than the income effect, so that there is a net increase in x). This can be seen by Comparing the substitution effect (x” ~ x), which is positive, to the income ifeet Gr" — x"), which is negative, ‘The frst is larger than the second with the ig. 2.14b, is when the ‘Opposite is true, so that the substitution effect (x" — x) is less than the income chlect Qe — xy tesulting in a net decrease in x. li may appear curious that the Consumption of 2 good decreases despite the Fact that its price has fallen. This phenomenon i refered to as the Giffen paradox, which occurs when # good is Etrongly inferior with respect to another. Again, the formalization of the defini- tion of inferiority in this ease can be made using the values of inconne elasticity fnd price elasticity, as we shall see later on. The Giffen paradox, where the Consumption of a good decreases with a lower price or increases with a higher price, may occur in transportation when comparing public and private modes of Travel. Its sometimes argued that reducing the price of urban transit travel can Cause a decrease in ridership, since potential travelers might allocate the in- treased purchasing power caused by the price decrease to acquire and use private neans of transportation. The extent to which this is true in general is uncertain, What is more likely is the situation in Fig. 2.14a, where the income effect is Sinaller than the Substitution effect. The same, of similar, phenomena do occur in air transportation where consumers may be faced with choices among different tnwvices at different prices. The income effect in the case of low-excursion-fare travel may or may not be smaller than the substitution effect, and the effect of ‘hanging the relative prices of different fare packages may not be obvious without 4 detailed study of the demand. (See Chap. 9.) DewaND THEORY 29 It shouldbe relatively easy to See from Fig. 2.14 that proportionate changes in all prices and income will result in no change in the optimal consumption patterns. The price increases will tend to reduce consumption ofall goods avail- Eble, and the income increase will have the opposite effect. If these changes are proportionate, -c., fall variables change by the same Factor, then the effects will Caneel out and no change will occur in the optimal consumption pattern. This propery is quite fundamental when deriving demand functions using the wily fnaximization principle. It implies that when the utility functions are smooth: and differentiable, the demend functions are homogenous. This is an important prop- erty, as we shall see later on in this chapter. Consumer demand functions With this basic theory of consumer behavior we ‘can now proceed to a formal definition of a demand function. Looking back at any of Figs. 2.10 to 2.14 we can see thatthe actual quantity of a good. say x1, that is consumed depends on the location of point M. This in tum depends on the price, not only of X; but also of the other good in question X. The location of M also depends on the budget level B and on the exact shape ofthe indifference ‘curves, or the utility function U(X). Any functional relationship that would give the quantity consumed x; of any good i in terms of all these factors is called a demand function for good i, In general tis not necessary to include all these terms explicitly in the demand function. Since we know from theory thatthe following, ‘condition must be satisfied wu, a 2.18) ‘we can eliminate the explicit reference to U(X) in the demand function and presume that the prices in the demand function wil suffice. The constant param- ters of the demand function will implicitly include @U/2x; or some function of jt. The demand function becomes then a relationship between the quantity xj and the prices ofall goods, the income or budget, and a set of parameters that stands for the uilty Fonction of the individual consumer: 3X; (By Ps Pas « «+ » Pa) (2.19) where X;is a well-defined function foreach good / and for an individual eonsUmer ‘with a given utility function, A. very fundamental property of demand is shown jn this fonction. The demand for a good is not only a function of its cost but also lof the costs of all other goods that can be considered substtutes..This property fs quite relevant when applying this theory to transportation demands. The de~ ‘mand for ar traffic is not independent of the cos of driving; the demand for urban mass transit is not unrelated to the price of gasoline that an auto driver would jncur; the demand for rail transportation of commodities is not independent of the rate structure of the trucking system, and so forth we ‘The concept of demand function can be illustrated graphically by looking at two-dimensional projections, The most commonly used such projection is the[30, t Lag Multiplying all terms by x.8/Bx; yields 1 2.25) 1 2.26) [Note that the first half of this expression pp1/B is the share of the budget spent tn good i and the second is the budget elasticity (or the income clasticty) ofthe Same good. Hence, if we define S; as the budget share of good i and Ji a the income elasticity of the demand for i, then a basic property of the demand function becomes. 1 a2 DSi _ DeManp THEORY 33 which means that, taking the expenditures as weights, the weighted average of 4 consumer's income elasticities is unity. Another related basic property can be “obtained by differentiating the budget constraint Eq. (2.24) with respeet to p;and converting the resulting equation to elasticities to yield Seyi = 5 2.28) where ey isthe cost (price) and cross-clastcities of the demand for good i. This Says that taking the expenditures as weights, the weighted average of the elas~ ticties of demand for all goods with respect to the price of one good is equal to the proportion of income spent on that good. "Another property of demand related to the price and income clastcities ofthe demand for one good is that the income elasticity equals the sum of the cost (price) and cross-elasticities. This can be derived directly from the homogeneity property which was discussed earlier and which can be stated as follows: Xi(B, Pts Poss «+ + Pa) = XMAB, py Abas s+» APR) (2.29) where Ais constant multiplier. Differentiating this equality with respect to A and then setting k= 1 gives ay om a aa eed eee 3h + Pl op, Pee 2.30) which can be converted to elasticities by dividing by x; to yield bade ean “This result is eferedt0 asthe Slutsy-Schultrelarionship, which hes some interesting implications, among them a direct corollary that applies when there are only two goods. If we consider Eq, (2.28) when ther ae only two goods £ andy combine it with Eq. (2.30), it can be shown that the following conditions result etna and 232) a tHa-e yt Fa) ince x and x are nonnegative quantities, this corollary states that ifthe price clastcity of one good is greater (less) than unity, then the income elasticity ofthe ‘other must be less (greater) than its price elasticity. It is important to remember that this result is only applicable when there are only two substitutable goods in the consumer's choice. Loosely interpreted, this result can be taken to mean the following: if consumeris faced with two goods, a necessity and 8 luxury, where the demand forthe necessity has a price elasticity less than unity, and the demand for the luxury has a price elasticity larger than unity, then the income elasticity of the demand for the necessity is less than its price elasttity;"and the income Clasticity of the luxury is larger than its price elasticity. The value of this result“4 TRANSTORTATION DEMAND ANALYSIS jn ransportaton applications is limited, if only because there ae few son in eons characterized by a wo-good model, One suchsituaton shat of 2 are eng te choice between communications and air ansportation as subs cares tenatves. If we consider thal ar transportation is Tuxury when ¢ory, pared ta communications elephones, flex), then tht Pe postulated that par vend for ait transportation is relatively price clastic and for comet, the demartatively price inelastic. In tis case, the income elasticity of the Ht met tan ts pice elasticity, and the oppsite iste forthe seconde i arttpen expect that ifthe firm's income (or budget) increased in the ste Fropston as, say, the price of air ansporation, a net increas Wt traffic ropration would result ut ifthe firm's budget increases inte sams Popo aerrgost of communications, then a net decrease in its purchases of coma 3s the ons Ofoes would res. This example serves to recall the income and aii anoffets discussed earlier. The Jerease in communications wot y ascriae due to the subatituton effect which wouk cause the fim v9 Sb 0 as cat trvel, Recall that ifthe frm’s budget inereases together withthe Pre rere at transportation and commonicaions in the same proportion, then Sothing will change in its consumption pattem (see Eq, (2-29)] example To ise the deivation of demand fanctns By iy ma Bae ere following ity anton te ase of 0 goo vents ere nye equates each good aNd 2M RSI pare 0 gt Bits the combinations of ya 1 B= pt pwr wweie ps and pe are the unit pices. Maximizing U subject to the Budget constraint can be done by setting -2=pH aR then substituting in U to obtain (8 pe vans) and seting 4U/0s, = 0, which yields ye a ia Fae and by symnery _ m8 2 Tat ae Dean misoRY 35 “These two demand functions exhibit unitary price elasticities and no In (X + 4) D=0,X+n>0 oa “This ransforination allows different functional forms in the untransformed vari- ables depending onthe value of A. Thus when A= 1, the transformations linear spd so fs the demand function; when A = 0, the transformation results in @ Tnetion linear in the logarithms, which is the multiplicative function; when se the demand function becomes quadratic, and so forth. The wse of 1, ‘hich is a location parameter, is to ensure that (X + 44) does not become negative, If all variables X are known to be positive, then it is possible to ‘liminate js and to simplify the transformation to Chapa AO InX Azo x 2.43) whichis refered tos the Box-Cox transformation. By including oF A. oF bath, the estimation of model parameters it is possible to determine empirically an appropriate functional form ofthe demand function. | | pewaxo THEORY 39 Gavdry and Wills (1978) and Hensher and Johnson (1979) have applied this method tothe estimation of transportation demand functions. It isto be noted that while this method does expand the scope of the ad hoe approach to model specification, it does not add any behavioral power to demand modeling. Further- fore, it does limit the functional forms to those that can be derived from the transformation. Thus a mixed multiplicative-exponential model cannot be esti= ‘mated directly with this method; it would have to be specified a priori. The estimation of transformation parameters does require simplifying assumptions in forder to extract from data both model structure and parameter values. Given the ‘complexity of the estimation procedures required to apply this method, it is probably preferable to simply specify demand models a priori and estimate their parameters using available data. Market Demand So far we have discussed the demand function of an individual consumer, who as mentioned eatlier could be a single individual, a household, or a single firm attempting to maximize consumption utility subject to an income or budget constraint. In reality, we are often interested in the behavior ofa total market, not of single consumer, Ths is particularly true in the case of transportation demand ‘analysis, for a major motivation is forecasting total traffic. The trafic generated by a single individual or houschold is only of limited interest in transportation planning. Therefore, a way must be found for passage from individual demand to market demand. if all individuals in a market had the same utility function, the same income cor budget, and faced the same prices or costs, then the market demand function ‘would simply be the individual function multiplied by the numberof individuals. ‘This situation is of course purely hypothetical. Indeed, if all individuals in the system were that similar, then there would be no need for @ theory; everything ould be predicted from the observation of a single individual. On the other hand, if all individvals in society had significantly different utility functions, budgets, and costs, then demand analysis would be intractable, because it would involve the analysis of immense amounts of data and very cumbersome computations. ‘While this scenario is likely to be closer to the truth than the first one, there are most probably large groups of individuals whose behavioral characteristics are Suffictently close that, for the purposes of demand analysis, they ean be consid red similar, All constmers in such a group could be represented reasonably well by a single individual "To develop some of the fundamental properties of market demand functions, ‘we assume a market made up of segments, each of which is homogenous in the ‘Sense that all its members have the same utility function and income or budget. ‘We assume for now that prices are the same for the entre market, although this assumption can be relaxed in order to account for possible price discrimination between segments or for possible differences in the perception of prices that may{40 TRARSFORTATION DEMAND ANALYSIS in fact be the same. Using the same notation as before, we consider the market demand funetion as the sum of individual demand functions: Sah Py Pir Xi Py Pye Pe Pr) (244) where Xs the demand for by market segment k, 8 the total market income, hal /¥is k's income. Its easy to ses from Eq, (2.44) thatthe following relation trisis between segment and market price elasticities Sexe “Ext siete ey the market price or rs-clasicity ofthe demand fo with respect ae ei oy and efethe comespoding elastic for market segment k. This tain pe kt lest iste weighted sum of segment latices whee Te ithts ae the quantities demanded by each segment Tee a lationship con be derived between income elasticities if iis asain har ne markets homogenous with espect income. In other word, sa arng lationship ens between segment and total market incomes Peal win a=1 2.46) where ax remains constant, then Eq. (2.45) will also hold for income elasticities. Furthermore, if Eq, (2.46) is valid, then the properties discussed earlier, and Shown in Eq. (2.25) and (2.28) for individual demand functions, will also hold for market demand, "The existence of a market utility function, oras itis often referred to, a social welfare function, that is well-defined, continuous, and convex to permit an Uprimization at the market level eannot be demonstrated. Market demand func- tons that are considered the result ofa utility optimization process are obtained by aggregating individual demand functions that are themselves derived feom tlity maximization, Alteratively, of course, market demand functions can be Specified using the ad hoe empirical approach mentioned earlier. “ 2.45) Aggregation of individual demand functions The most straightforward ae eee ronoving fom individual to market demand fonctions is simply to sum the segment fanctions a= shown in Eq, 2.44), a enson to this summation approach is to obtain the markt faction by sntegeing he density function ofthe variables tat dif from one segment fo eee ye the ranges ofthese varbles, Thos, i€ the individual demand Pea oe gnown funtion of pees and income, such as XP (, ys Px Jpmeton I 5 Jand if te sepnens we distibted ove income sss according Pe gequndey function fem, then markt demand canbe given by Ky Pose oad J, Xillspy Poss Psy) dn AN) — DEMAND THEORY 41 “This approach can be used for any stratifying variable for which the fre- quency function of the market segments is known. The method is sometimes feferred to as the staification approach and has been employed in demand analysis for many years, perhaps starting with its use by Pareto in 1895. The procedure may use distibutions that are observed empirically and estimated Ftatisially 0 specified a priori on the basis of theoretical considerations or Computational advantages. For example, in numerous applications the income tistrbution has been assumed to follow gamma density function (Kanafani (1972), ‘Agaregation by entering segment averages ofthe demand function variables in the market function is commonly used. The method has serious pitfall, however, fr itis known that the function of averages of variables isnot in general the same as the average of functions. In ater words segment demand functions XP (I, pis Pas « « « » Pn) are aggregated to a market demand function by replacing 1* with the average over all segments | and multiplying the function by the. umber of segments in the population, then in general a function would be ‘blained that is not equivalent 10 the sum ofall the segment demand functions: SK sis Pts +++ Po) = Bs Xt nv Pts Par «== Pa) + A (248) where & is an error referred to as the aggregation bias. When the functions X} ie linear in all their variables, Q vanishes, and hence this aggregation method ‘works only for linear demand funetions. Given that most functions used in transportation demand analysis are not linear, this aggregation method is not Suitable, but its simplicity has always been a strong temptation to use it. Other ageregation methods have been developed for specific transportation applica- tions. We shall se some ofthese in later chapters “The essence ofthe aggregation problem is o reduce the magnitude ofthe analysis. Inordr o avoid having to analyze the behavior of every individusl, one sims to identify asa semple a small group of individuals whose behavior i then ‘observed. If these individual are selected carefully so that they do represent the {otal population, then their individual demand models can be considered accept- «able proxies for lager segments of the population and ean be combined to give ‘a market demand function. ‘The uses of demand elasticity As # measure of the response of demand to changes in the variables that affect it, elasticity can be a useful tool in demand analysis. However, care should be excercised to avoid pitfalls that can easily arise in interpreting elasticity values. Theoretically, it should be clear from Eq. (2.20) that elasticity is a relation between differentials and that it is only valid for infinitesimally small changes in variables: Axis yy Aviv (2.49)(42 TRANSPORTATION DEMAND ANALYSIS “The use of elasticity values to interpret real changes should be recognized as an approximation and should be avoided when these changes are large. lesiiy, aeertelation between differentials, is valid at the points at which it is defined. Theoretically, therefore, elasticity isin fact of rather limited use. ts use to interpret the impacts of changes in demand variables should be recognized as an approximation and should be avoided for large changes. To illustrate the diserepencies that can arise when using demand elasticity to interpret the effects of changes, we consider the following example ‘Example Let the demand for air trips T between two cities be given by the following function of the airfare p: T = Xp”, where K is @ constant and je the price (fare) elasticity of demand. Suppose the a = —2.0, suggesting that the percentage change in traffic is twice the percentage change in price. Let the fare be doubled, i.., increased by 100 percent. The elasticity of 55.0 would imply that this would cause traffic to decrease by 200 percent, “hereas a simple calculation would show traffic will actually decrease by @ Taetor of 4 or by 300 percent. Its clear then that elasticity values cannot be teed to predict the impacts of such large variations in variables. What nagnitudes of changes canbe interpreted using elasticity values depend on the form of the demand function and onthe elasticity values themselves. (See Prob. 2-1.) What discrepancies canbe tolerated will of course depend on the vavuve of the application. Clearly when a demand function is known, then it should be used (o predict the impacts of changes. “Another source of discrepancy in interpreting elasticity valves results when they are calculated by comparing discrete changes in variable. This ean be done cither empirically or by calculating such changes from a given demand function Such an elasticity is referred to as an arc elasticity, a5 contrasted to point slustciy, which is given by Eq. (2.20). For observed or calculated changes Ax fand Av, one definition of arc elasticity is - Axis ex = 2.30) “There are two problems inherent in this definition. One is that arc elasticity wil differ from point elasticity, the difference increasing as Av (ot Ax) increases. “The second is that inconsistent results can be oblained; when a change in a vasable V is reversed, its effect on the dependent variable X will not be the same re the original change. We can illustrate these problems with the following example. Example Suppose the demand for trips Tis given by the following function of fare P: T = 10007 | | ewan THeoRY 43 ‘Suppose further that an initial condition is given by Po = 10 for which Ty= 10. A change in fare to py = 15 results in trafic decreasing to Ty = 44, The arc elasticity calculated using Eq. (2.50) will be . (det = 10) /(15— 10 oe SV) When chngeisevcsed oat = 1Sandpy = 1Ofr which T= 4.4 snd T= oye ely becomes H/C) - 39 ‘These values are diferent, and they are both different from the point elas- ticity of ~2.0. A closer approximation is obtained when the arc elasticity is defined as 12 aa _Alnx ewe = Bin cy which for the above example will equal ~2,05, which is closet to the true Value of ¢ = ~2.0. Another approximation can be obtained by using the following definition of arc elasticity (= ag + 9) Ga Fal 0) “which for the above example yields 2 value of ~1.94. Equation (2.51) oF (2.52) should always be used for computing elasticity rather than Eq. (2:50). Using these definitions, the problem of inconsistency does not occur when reversing changes in variables. 52) In addition to its use in predicting changes in demands, elasticity, with respect to supply variables, i used to predict changes inthe resources consumed. For example, the elasticity of trip demand with respect to price is useful in predicting changes in toll expenditures; the elasticity with respect to travel time Fe useful in predicting changes in total time spent on travel, and so forth, To see this, consider the price (or cost) elasticity ¢,. The total expenditures E when there are x trips are given by B=» ass Different with respect to price p ives ae Bayh es =2(2 +3) € et . = (1 + &) (2.54)444 TRANSPORTATION DEMAND ANALYSIS, ‘This isa rather useful result. We can see that sine ep is negative, price and ‘xpenditares will vary in the samme manner when|éy| < Ty and in opposite manner soho ley > 1. Thus fora relatively inelastic demand an increase in price will MAC ig an inerease in total expenditures and vice versa, When X refers to TTansportation offered by an operator fora fee, such as inthe case of airline or tuioad traffic, then E will be the operator's revenue. An operator, such as an inne, would then be quite intersted ina good estimate ofthe fare elasticity in Suen to determine whether an increase in fare, for example, would result in an shevease or a deerease in total revenues. Note that when [| = 1, £ will remain invariant to changes inp, as ean be séen from Eq. (2.54). Démand, revenues, and benefits The demand function has a wider inter- pretation than simply a relationship between quantity and price. As seen in the previous paragraphs, there i a relationship between the demand function and the Fonction describing total expenditures, or revenues, as the case may be. In addition, there is a direct interpretive relation between demand and the user benefits that may Actin from the consumption activity in question. In this section ‘we shall explore these relationships. ‘Consider a demand function X = X(p) where p represents the cost or price of consuming one unit of X. As shown in Fig. 2.17, such a demand function can J Figure 2.17 Toa expenitrs. be used to compute total expenditures, or operator revenues, at any point as E=pX@) (2.55) 1s the product of the coordinates of the demand function in the XP plane. ‘The demand function can also be used to determine the value of p for any given value of X. Such a value would represent the average expenditure, price, for average operator revenue AE(«) p= AEG) =X") (2.56) For the special case when the demand function is linear, the total ex pengitures E vary parabolically with X as can be ascertained from Fig. 2.18. The ‘DEMAND THEORY 45 total revenue reaches maximum at the point when z a AXON _ y ® ox xatP 0 = pil + ve) asp which occurs when ¢ = -1. Thus total expenditures or operators’ revenues are ‘maximized at the point where the demand elasticity equals unity. This isthe same asspoint A’ in Fig. 2.16, the point where the price is half the value at which consumption X vanishes. Figure 2.18 also shows the corresponding curve of Figure 2.18 Tota and wrargina evene for iar demand fonction marginal expenditures which are positive up to point x' and then negative indi cating declining total expenditures or revenues. This curve is often referred to as the marginal revenue curve and is commonly used in analyzing pricing policies. We shall se it again in the next chapter on supply analysis. Its important to note, however, that this curve, the magginal revenue, is a plot of 4E/éx and should not be confused with dE/dp as derived in Eq. (2.54). The two are easily related. The revenue and marginal revenue functions can take on different forms depending on the demand function itself. Using Eq. (2.54) or (2.57) one can generate these functions for a variety oF cases (see Prob. 2.1). Using Eq. (2.56) we can interpret the demand function as one that gives the average price paid of cast incurred by each consumer. Figure 2.19 shows such{46 RANSFORTATION DEMAND ANALYSIS. Figure 219 Tents meauted by wilianes (0 py. a demand function where two points are identified, (x, p) and (x ~ 14 * Bp) ‘These point imply that with price p there are x consumers willing (0 ay Wit price, or one consumer inthe case of an indvigual demand funciton) willing to Fay the pice x times. When te price ies top + Bp» then the number x drops Prone unit The interpretation of his stat the consumption of de 318 sm Rah a price p, but nota price p + dp. The consumption ofthe (xa Pst Ot eororth at most p + Bp, and 30 forth. Thus the value p for any given represen’s eorsnimom worth ofthe consumption ofthe xth unit ands considered (0 Bs the user benefit accruing from this consumption activity. In the tra ae teat, X (x) ives the user benefit derived from a trip, as meas sorvsnt of price, of cost, thatthe trip maker is willing to incur. Its therefors We art of user benefit tat is acerved atthe margin as X changes from x = 1) amouriyence the function X""(x) is referred to as marginal benefit function. ‘Relesing to Fig. 2.19, itcan be seen that ifthe valve ofthe ordinate ofthe eres [ves the benefit othe xt user, then he area unde the curve between ne Org siete value X = x will equal the sur ttal ofall the user benefits, This valve is given by Bey [ornare 2.58) itis common to subtract from this value an amount equal to X" x), which i He aaa ceruatly incurred by al users when the total volume is x=THis leaves what ‘hight be considered the net benefit to users, a value refered to asthe consumers surplus (CS): DEMAND THEORY 47 ose) = [fr ar] = 3%) 2.39) Consumer surplus is often used in evaluation as a measure of the net user benefit, ‘Seeruing from the operation of a transportation system for which the demand is known, “To summarize, the demand curve when drawn on an XP plane represents a relationship between quantity consumed X and unit price or cost p. It also Tepresens the average expenditure or revenue that is obtained at any value of X. ‘The product ofthe coordinates ofthe demand curve gives the otal expenditure tr revenue from which a marginal revenve curve can be derived by differ- Sriation, ‘The demand curve also represents the marginal benefits accruing (0 consumers o to consumers ofa transportation facility. The area under the curve Eetween the origin and a point X = x represents the total benefits accruing from the consumption of x units. Demand, supply, and equilibrium Knowledge of the demand function alone is aanrsaficient for the prediction of quantity consumed, nor of any of the other variables associated with it, The demand function is a relation between quantity Yemanded and price, and inorder to determine the quantity demanded, the price setst be known, Conversely, ifthe quantity demanded is known, then the demand Tonetion will permit the determination of that price which brings about that quantity. The framework used for dealing with this question is that of equ Torium, a concept which has been used in economic analysis since the middle of the nineteenth century. Equilitrium is said’ to be achieved when the factors that affect the quantity demanded X(p), and among them the price, and the factors that determine the quantity supplied S(p), also among them the price, result in both these quantities being equal statically or converging toward equality dynam- ically. i order to apply the concept of equilibrium, we need to introduce the supply “function. As withthe demand fanction, the supply function is acelation between ‘ivantity and price P, among other variables, ut it represents the mechanism by which the quantity is produced or offered ina market. Thus the supply Fanstion can represei The quantity of goods a producer is willing to-offer st @ fiven price: tons of farm products ata given market price, airline seats ata given evar, and so forth. It can also represent the price that must be charged or the est that must be incurted in order to offer a certain quantity: the air fare that an Sirline must charge in order to break even in a particular market, the price ‘emanded by the supplier of a searce commodity, and so forth. “The simplest form of equilibrium is when the following conditions exist x =X@) (2.600) s=5@) 2.60) a5, 9X) = S00) (2.60¢)|48 TRANSPORTATION DEMAND ANALYSIS “The price p is that price at which the quantity demanded x equals the quantity Sulied This static equilibrium in the ease of one good can be exteided 0 @ oan ers Figure 2.20 Ste equivum of demand and seo. swote market of many goods. 1s shown graphically in Fig, 2.20 in whic for oa a funtion s shown to bean inceasing function, The exact ist in he sup) andthe exten and uniguenes Shap ft eran doped on nye of mak invaved A dessin of oo ar rn question otanspoion she subj of he rest chapter es euivium concept tans wth the basic notion tat te yet ea ine pv il pendon he rice ding the previous Ld etgeddrng prod wl aso depend on the pice charged Fe nod an nee te demand exceds he pp oF Tnose ono ons are expressed 25 xp) 2.61a) = Sper) 2.610) pie pin + #66 ~ Sa) (2.610) where gis @ parameter that is supposed fo be positive to indicate that when seer d exceeds supply the price willtend torise, and vice versa. A special case Gf this dynamie equilibrium formulation is when Eq. (2.61c) is replaced by ns 2.62) “This case is refered 10 as the cobweb model and implies thit equilibrium is Tiheved by price dcilaidns until Eq 2.62) issatisFied. As shown in Fig. 2.214 ares these osaillatons wil either converge t0 a static equilibrium or will strerge indefinitely depending on wheter the curve i steeper or flatter than the savory curve, respectively Tees ofthe diverging oscillations is nt arealistc sare of marke ystems, fr itis rarely observed that prices will oscillate widely DeMaxp Tazory 49 ua anti ears res ° o Figure 2.21 The cobweb mois of dynamic equilibrium, (a) Converging (6) dveeing for long periods of time. Equation (2.61a) providesa more robust model, for with ‘a sufficiently small qa static equilibrium will be achieved. . Example The following numerical example serves to illustrate equilibrium between demand and supply and how this equilibrium is achieved in the dynamic model. Consider the following static demand function Xp) = 10,000 - Sop X might be number of daily air trips in a particular market and p air fare in dollars. Consider also the following supply function: S(p) = 200p — 20,000 ‘This supply function could refer to the number of daily seats offered by the airlines ata given fare level. It could also be interpreted as a direct result of an airline cost function which determines the price that must be charged in frder to supply a given number of seats, p = 100 + 0.0055. The demand ‘and supply functions ean be solved directly for a static equilibrium, which Clearly exists and is unique in this linear case since dX/dp <0 and S(ép > 0. At p = p* static equilibrium is achieved: =X) = Sp" 120, and x = s = 4000. the solution of whieh is p This equilibrium solution can be shown (0 be unstable according to the cobweb model since aS/dp > aX dp. However, a dynamic demand and supply system according to Eqs, (2.614) to (2.61c) can be found that would lead to an cquilibrium solution. Suppose the following dynamic system is used with = 0.002: 10,000 ~ 50p, 8, = S(Pr-1) = 200pr-1 ~ 20,000 Prt + 0.002 (it = S11)