Post on 03-Apr-2018
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Demand, Supply and
Equilibrium
Transpor tat ion Econom ic Course
Budi Yulianto, ST, MSc, PhD
Civil Engineering Department
University of Sebelas Maret
Indonesia
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Introduction
There are a number of reason that people and goodsmove from one place to another.
This movement is possible because transportation
systems, including their network (roads, streets, raillines, etc).
In this chapter, will discuss the interaction between:
- transportation demand (e.g. the desire to make
trips, with the ability to pay for it) and- transportation supply (e.g. the availability of trafficlanes to make the trips).
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Introduction
Economics is the study of how people and society endup choosing, with or without the use of money, toemploy scarce productive resources that could havealternative uses to produce various commodities and
distribute them for consumption, now and future,among various persons and groups in society. Itanalyses the costs and benefits of improving patternsof resources allocation (Samuelson, 1976).
Ekonomi adalah studi tentang bagaimana manusia dan masyarakat yang padaakhirnya memilih, dengan atau tanpa mengunakan uang, untukmenggunakan sumber daya produktif yang langka yang dapat memilikikegunaan alternatif untuk memproduksi berbagai komoditas danmendistribusikannya untuk konsumsi, sekarang dan masa depan, di antaraberbagai orang dan kelompok dalam masyarakat. Ekonomi menganalisis
biaya dan manfaat dari memperbaiki pola alokasi sumber daya.
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Introduction
Economics can be divided into 2 main streams:- microeconomics (small scale) it deals with theeconomic behaviour of individual units such asconsumers, firms and resource owners.
- macroeconomics (large scale national-international,of wealth of society) it deals with the behaviour ofeconomic aggregates such as Gross National Product,the level of employment (Mitchell, 1980)
Planning, designing, constructing, operating, andmaintaining transportation facilities represent annualcommitments of hundreds of billions of $s, yetengineers, planners, and policy analysts who areresponsible for transportation work often have little or
no formal training education in economics.
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Introduction
This presentation discuss:
the basic concepts of demand, supply andequilibrium functions that are fundamentalto understanding, designing, and managingtransportation systems.
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Transportation Demand
In general, the demand for goods and servicesdepends largely on consumers income and theprice of the particular good or service relative to
other price. For example:
o The demand for travel depends on the income ofthe traveler.
The choice of the travel mode depends on severalfactors, such as the purpose of the trip, the distancetraveled, and the income of the traveler (Stubbs et
al, 1980).
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Transportation Demand
A demand function for a particular product represent thewillingness of consumer to purchase the product atalternative prices.
A demand function shows, a number of passengerswilling to use a commuter train at different price levelsbetween a pair of origins and destinations, for a specifictrip, during a given period.
The term price stands for all outlays perceived by thetraveler for a given trip.
For example, the price for trip could be the fare; traveltime (access, waiting, and in-vehicle time; comfort;safety; convenience; reliability; and several tangible and
intangible factors.
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Transportation Demand
A linear demand function or travel for a given pair oforigin and destination points, at specific time of day andfor a particular purpose is:
q=a - bpq is the quantity of trips demanded,p= price
aand bare constant demand parameters.
Price
,p
Quantity, qqAqB
pA
pB
A
B
Demand Function The demand function is drawnwith a negative slope expressinga familiar situation where adecrease in perceived priceusually results in an increase in
travel.
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Determinants of Household Demand
The pr ice of the productin question. The i ncomeavailable to the household.
The households amount of accumulatedwealth.
The householdstastes and preferences. The households expectat ions about future
income, wealth, and prices.
A households decision about the quantity of aparticular output to demand depends on:
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Quantity Demanded
Quant i ty demandedis the amount(number of units) of a product that ahousehold would buy in a giventime period if it could buy all itwanted at the current market price.
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Demand in Output Markets
A demand scheduleis a table showinghow much of a given
product a householdwould be willing tobuy at different prices.
Demand curves areusually derived fromdemand schedules.
PRICE
(PER
CALL)
QUANTITYDEMANDED
(CALLS PER
MONTH)
$ 0 30
0.50 25
3.50 77.00 3
10.00 1
15.00 0
ANNA'S DEMAND
SCHEDULE FOR
TELEPHONE CALLS
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The Demand Curve
The demand cu rveis a graph illustratinghow much of a given
product a householdwould be willing tobuy at differentprices.
PRICE
(PER
CALL)
QUANTITY
DEMANDED
(CALLS PER
MONTH)$ 0 30
0.50 25
3.50 7
7.00 3
10.00 1
15.00 0
ANNA'S DEMAND
SCHEDULE FOR
TELEPHONE CALLS
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The Law of Demand
The law of demandstates that there is anegative, or inverse,
relationship betweenprice and the quantityof a good demandedand its price.
This means thatdemand curves slopedownward.
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Other Properties of Demand
Curves
Demand curves intersectthe quantity (X)-axis, as aresult of time limitations
and diminishing marginalutility.
Demand curves intersectthe (Y)-axis, as a result of
limited incomes andwealth.
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Related Goods and Services
Normal Goodsare goods for whichdemand goes up when income ishigher and for which demand goesdown when income is lower.Infer ior Goodsare goods for whichdemand falls when income rises.
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Related Goods and Services
Subst i tutesare goods that can serve asreplacements for one another; when theprice of one increases, demand for theother goes up. Perfect subs t i tutesareidentical products.
Complements are goods that go
together; a decrease in the price of oneresults in an increase in demand for theother, and vice versa.
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Shift of Demand Versus Movement Along a
Demand Curve
A change in demandisnot the same as a changein quant i ty demanded.
In this example, a higherprice causes lowerquant i ty demanded.
Changes in determinants
of demand, other thanprice, cause a change indemand, or a shi f tof theentire demand curve, fromD
Ato D
B.
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When demand sh i f tstothe right, demandincreases. This causesquant i ty demandedto begreater than it was prior tothe shift, for each andevery pr ice level.
A Change in Demand Versus a Change in
Quantity Demanded
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A Change in Demand Versus a Change in
Quantity Demanded
To summarize:
Change in price of a good or serviceleads to
Change in quantity demanded(Movement along the curve).
Change in income, preferences, or
prices of other goods or servicesleads to
Change in demand(Shift of curve).
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The Impact of a Change in Income
Higher incomedecreases the demandfor an infer iorgood
Higher incomeincreases the demandfor a normalgood
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The Impact of a Change in the
Price of Related Goods
Price of hamburger rises
Demand for complement good(ketchup) shifts left
Demand for substitute good (chicken)
shifts right
Quantity of hamburger
demanded falls
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From Household Demand to
Market Demand
Assuming there are only two households in themarket, market demand is derived as follows:
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Supply in Output Markets
A supp ly scheduleis a tableshowing how much of a productfirms will supply at different
prices.
Quant i ty suppl iedrepresents thenumber of units of a product that
a firm would be willing and able tooffer for sale at a particular priceduring a given time period.
PRICE
(PER
BUSHEL)
QUANTITY
SUPPLIED(THOUSANDS
OF BUSHELS
PER YEAR)
$ 2 0
1.75 10
2.25 20
3.00 304.00 45
5.00 45
CLARENCE BROWN'S
SUPPLY SCHEDULE
FOR SOYBEANS
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The Supply Curve and
the Supply Schedule
A supp ly curveis a graph illustrating how muchof a product a firm will supply at different prices.
0
1
2
3
4
5
6
0 10 20 30 40 50Thousands of bushels of soybeans
produced per year
Price
ofsoybeans
perbushel($)
PRICE
(PER
BUSHEL)
QUANTITY
SUPPLIED
(THOUSANDS
OF BUSHELS
PER YEAR)
$ 2 01.75 10
2.25 20
3.00 30
4.00 45
5.00 45
CLARENCE BROWN'S
SUPPLY SCHEDULE
FOR SOYBEANS
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The Law of Supply
The law o f supp lystates that there is apositive relationship
between price andquantity of a goodsupplied.
This means thatsupply curvestypically have apositive slope.
0
1
2
3
4
5
6
0 10 20 30 40 50
Thousands of bushels of soybeansproduced per year
Price
ofsoybeans
perbushel($)
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Determinants of Supply The pr iceof the good or service.
The cos tof producing the good, which inturn depends on:
The pr ice of requ ired inpu ts(labor,capital, and land),
The technologiesthat can be used
to produce the product, The prices of related p roduc ts.
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A Change in Supply Versus
a Change in Quantity Supplied
A change in supp lyisnot the same as achange in quant i tysuppl ied.
In this example, a higherprice causes higherquant i ty suppl ied, and
a move alongthedemand curve.
In this example, changes in determinants of supply, otherthan price, cause an increase in supply, or a shi f tof
the entire supply curve, from SA to SB.
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When supp ly shi f tsto the right, supply
increases. Thiscauses quant i tysuppl iedto begreater than it wasprior to the shift, fo reach and every pr ice
level.
A Change in Supply Versus
a Change in Quantity Supplied
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A Change in Supply Versus
a Change in Quantity Supplied
To summarize:
Change in price of a good or serviceleads to
Change in quantity supplied(Movement along the curve).
Change in costs, input prices, technology, orprices of
related goods and servicesleads to
Change in supply(Shift of curve).
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From Individual Supply
to Market Supply
The supply of a good or service can be definedfor an individual firm, or for a group of firmsthat make up a market or an industry.
Market supp lyis the sum of all the quantitiesof a good or service supplied per period by allthe firms selling in the market for that good orservice.
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Market Supply
As with market demand, market supplyis thehorizontal summation of individual firmssupply curves.
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Market Equilibrium
Only in equilibriumis quantity suppliedequal to quantitydemanded.
At any price level
other than P0, thewishes of buyersand sellers do notcoincide.
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Market Disequilibria
Excess demand, orshortage, is the conditionthat exists when quantitydemanded exceedsquantity supplied at thecurrent price.
When quantity demandedexceeds quantitysupplied, price tends torise until equilibrium isrestored.
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Market Disequilibria
Excess supply, orsurplus, is the conditionthat exists when quantitysupplied exceeds quantity
demanded at the currentprice.
When quantity suppliedexceeds quantity
demanded, price tends tofall until equilibrium isrestored.
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Increases in Demand and Supply
Higher demandleads tohigher equilibrium price andhigher equilibrium quantity.
Higher supplyleads tolower equilibrium price andhigher equilibrium quantity.
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Decreases in Demand and Supply
Lower demandleads tolower price and lowerquantity exchanged.
Lower supplyleads tohigher price and lowerquantity exchanged.
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Relative Magnitudes of Change
The relative magnitudes of change in supply anddemand determine the outcome of market equilibrium.
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Relative Magnitudes of Change
When supply and demand both increase, quantitywill increase, but price may go up or down.
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Example 1
The travel time on a stretch of a highway lane connecting two activitycentres has been observed to follow the equation representing theservice function:
t= 15 + 0.02*v
Where t and v are measured in minutes and vehicle per hour,respectively. The demand function for travel connecting the twoactivity centres is
v= 4000 120*t Sketch these two equations and determine the equilibrium time
and speed of travel.
If the length of the highway lane is 20 miles. What is the averagespeed of vehicles traversing this length?
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2000 4000 v(vph)
t(min)
25
15
t= 15 + 0.02*v
v= 4000 120*t
Solution Example1
(647, 27.94)
Therefore:
v= 647 vehicles/hour
t= 27.94 minutes
Service function : t= 15 + 0.02*v
Demand Function : v= 4000 120*t
Speed = (20 * 60) / 27.94 = 42.95 mph
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Example 2
An airline company has determined the price of seat on a particularroute to be
p = 200 + 0.02*n
The demand for this route by air has been found to ben = 5000 20*p
Wherep is the price in $, and n is the number of seats sold per day.
Determine the equilibrium price charged and the number of seatsold per day.
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Solution Example 2
The functions:
p = 200 + 0.02*n
n = 5000 20*p
These two equations yieldp = $214.28 and n = 714 seats.
Discussion:
The logic of the two equations appears reasonable. If the price of anairline ticket rises, the demand would naturally fall.
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Transportation Demand, Supply, and
Equilibrium
Trips are made between 2 towns A and B over a narrow,2 lanes, unpaved road, which presently is 5 km in length.
140 180
0
10
20
30
100 200 300 400
17.514.0
Travel demand curve
Quantity (vehicle trip / day)
Unitcost(#
/trip)
0
10
20
30
100 200 300 400
Travel demand curve
Quantity (vehicle trip / day)
Unitcost(#
/trip)
A B
The unit price getshigher, there will
be fewer tripsmade over the
road
Negative slope inthe demand
curve!car
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Customer Surplus
140 180
0
10
20
30
100 200 300 400
17.5
14.0
Travel demand curve
Quantity (vehicle trip / day)
Unitcost(#
/trip)
0
10
20
30
100 200 300 400
Travel demand curve
Quantity (vehicle trip / day)
Unitcost(#
/trip)
Some people willing to pay >#14. For instance #17.5.
As consequence, there issurplus which accrues topeople willing to pay more
(#17.5-#14) = #3.5; they canuse this money to use forother purposes saving,investment, etc.
This CS can be thought of as
a benefit arising from trip-making and summation ofthese benefits for all tripsmade give total benefits ondaily trips made by users=0.5 (#30-#14)*(180-0) =
#1440 per day
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Supply or Marginal Cost Curve
0
10
20
30
100 200 300 400
Supply curve
Quantity (vehicle trip / day)
Unitcost(#
/trip
)
[1] Tax payments
[2] Vehicle operation, maintenance
[3] Time
Element of cost associated
with each trip driven on the
road:
1st of these costs might be fortax payments on fuel, tires,
etc..This would increasesomewhat with the number ofdaily trips made on highway, sothat slightly rising line [C1]
In addition [1] is the unit vehicleoperating and maintenance costs.
A reasonable assumption would bethat these would rise somewhat withincrease in travel volumes since moredelays, idling of engines, longer timeon the road (more fuel consumption),greater expenses for driver time,
etcThese costs + [C1] = [C2].
Travel time costs increase sharply with volumeas congestion on the road slows traffic andincreases the time for each trip.
The sum total 3 unit prices, calculated for each
daily trip making level, is represented by [C3].
0
10
20
30
100 200 300 400
Quantity (vehicle trip / day)
Unitcost(#
/trip
)
[1] Tax payments
0
10
20
30
100 200 300 400
Quantity (vehicle trip / day)
Unitcost(#
/trip
)
[1] Tax payments
[2] Vehicle operation, maintenance
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Equilibrium
Supply curve
0
10
20
30
100 200 300 400
Demand curve
Quantity (vehicle trip / day)
Unitcost(#
/trip
)
Supply curve
0
10
20
30
100 200 300 400
Demand curve
Quantity (vehicle trip / day)
Unitcost(#
/trip
)
197
12.5
Equilibrium
point
No amount of trips > 197 will be made since, after a period time, some people will find that the price ofmaking the additional trips is > than they are willing to pay (the supply curve lies above the demand curve).
No amount of trips < 197 will be made since, after a period of time, some people will realise that the price ofmaking a trip is < that which they are willing to pay (the supply curve lies below the demand curve).
Thus, additional trips will be made until the unit price equals that which the travellers are willing to pay (# 12.5).
Total benefit on daily tripsmade by users
0.5 (30-12.5) *(197-0) =#1724
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Demand Curve Shifted
The demand and supply concepts can be enlarged to take intoaccount the consequences both of changes in the schedule ofdemand and proposals for possible alternative improvement to theroad.
In cases where theoverall income levelshave been rising, andthese increases usuallylead to corresponding
increases in thewillingness of people topay for certain good orservices thisphenomenon is referredto as a shift.
0
10
20
30
100 200 300 400
Old demand curve
Quantity (vehicle trip / day)
Unitcost(#
/trip)
197
12.5
Supply curve
40
0
10
20
30
100 200 300 400
Old demand curve
Quantity (vehicle trip / day)
Unitcost(#
/trip)
197
12.5
Supply curve
40
256
227
15.017.6
New demandcurve
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Equilibrium New Demand Curve
0
10
20
30
100 200 300 400
Old demand curve
Quantity (vehicle trip / day)
Unitcost(#
/trip)
197
12.5
Supply curve
40
256
227
15.017.6 New demandcurve
New equilibrium point(227,#15.0).
Both the amount ofmoney paid for travel
and the number of tripsincreases:
#12.5 #15.0
197 227
This situation implies that rising economieslevels lead to increases in travel and explain tosome extent why some roads are used to their
capacity long before expected.
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Supply Curve Shifted
0
10
20
30
100 200 300 400
Travel demand curve
Quantity (vehicle trip / day)
Unitcost(#
/trip)
197
12.5
Supply curve
40
0
10
20
30
100 200 300 400
Travel demand curve
Quantity (vehicle trip / day)
Unitcost(#
/trip)
197
12.5
Supply curvepresent road
40
Supply curveproposed road
259
7
Travel cost reduction increase trip makingNew equilibrium point (259,#7)Cost reduce: #12.5 #7
Number of trips increase: 197 259
New road will be animprovement over the old
road, in that it will be straighter,will have better road geometryand surface.
This cause, the new road willlead to a reduction in both theoperating and travel time coststhat help to make up the short-run supply curve.
The price would be lowerprimarily because of decreasein motor fuel needs broughtabout by strengthening ofhorizontal curve, smoothingvertical curve, higher capacity
route between A and B.
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Equilibrium New DS Curves
Quantity (vehicle trip / day)
0
10
20
30
100 200 300 400
Old demand curve
Unitcost(#
/trip
)
Supply curvepresent road
40
Supply curveproposed road
8.3
0
10
20
30
100 200 300 400
40
227
15.0
New demand curve
302
Equilibrium point: new demand & supply curves (302, #8.3)
present road with new demand (227,#15.0)
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Benefits from each Scheme
Total benefit on daily tripsmade by users (for presentroad and new demand).
0.5*(35.16-15.0)*(227-0) =#2288 per day
Total benefit on daily tripsmade by users (forproposed road and newdemand).
0.5*(35.16-8.3)*(300-0) =#4051 per day
The increase in futurebenefits attributed to thenew highway
#4051 - #2288= #1763 per
day
Quantity (vehicle trip / day)
0
10
20
30
100 200 300 400
Old demand curve
U
nitcost(#
/trip)
Supply curvepresent road
40
Supply curveproposed road
8.3
0
10
20
30
100 200 300 400
40
227
15.0
New demand curve
302
Quantity (vehicle trip / day)
0
10
20
30
100 200 300 400
Old demand curve
U
nitcost(#
/trip)
Supply curvepresent road
40
Supply curveproposed road
8.3
0
10
20
30
100 200 300 400
40
227
15.0
New demand curve
302
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To be continued.
Sensitivity of Travel DemandElasticities