More on Demand-Supply relationships

Demand

Demand relationships are typically drawn in two dimensions D = F(P)

In reality, demand is a functions of several dimensions D = F(P,price of substitutes, price of

complements, income, etc.)

Demand relationship

The relationships of variable relative to quantity demand is view in term of elasticityPercentage Change in quantity demanded

Percentage change in price

Demand

P

Q

Elastic DemandEp < -1

Elastic Demand-1<Ep < 0

Ep = 0

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10

110

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Ames Daily Transit Demand

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

- 5,000 10,000 15,000 20,000 25,000 30,000

Ames Transit Demanad

0.33- y elastricit Price

)5,800(fare demandsit daily tran -0.33

Ames

Constant Elasticity

Demand and Need

Demand and need are not the same Need is subjective and implies

knowledge of requirement Peterson and Smith equation for low

income and elderly need for demand responsive transit

Supply in Completitive Market

Suppliera Supplierb Supplierc SupplierdTotal Market

pSRMC

SRAC

SRMC

SRAC

SRMC

SRAC

Market Demand

Market Supply

qa qbqc Q

Supply

Where there are several suppliers, the market is the sum of individual producers.

In transportation supply modeling, the supply is generally one facility and is the same at the cost curve.

Problem is that every one always pays the average cost.

Example of miss-allocationQm

Flow

Speed

Km

KmKj QmDensity Flow

Um Unstable Flow

Oklahoma City Central Expressway

$80 million per mile or a capital cost of $4.1 million per mile per year

Capital plus operating cost per year $5 million per mile

8 lane facility and 1.5 hours per peak period when 4th lane in each direction is used (in either direction)

7.5 hours per week or 375 hours per year

Example continued

($5mill/8)(1/375)=$1,667 per Lane Mile per hour

Assume an hourly flow of 1,700 vehicles per hour

Yearly cost 1,667/1,700 = $0.98 per vehicle per mile

What the user paysRegistration ~ $100/year=100/12,000 miles= $0.0083/mile

Example continued

Gas taxes (in 1988) Federal tax – $0.08 per gallon (in

highway fund) State tax - $0.12 per gallon (a guess) Total gas tax $0.20 per gallon Gas tax per mile 0.20/20 gpm = 1 cent

per mile Total tax – almost 2 cents per mile Deficit is almost $1 per mile

FYI Current state gas taxes Gasoline(¢/g) Diesel (¢/g) Gasoline(¢/g) Diesel (¢/g) Alabama 20.3 21.3 Missouri 17.6 17.6Alaska 8 8 Montana 27.8 28.6Arizona 19 28 Nebraska 28 27.4Arkansas 21.8 22.8 Nevada 32.5 28.6California 44.7 45 New Hampshire 20.6 20.6Colorado 22 20.5 New Jersey 14.5 17.5Connecticut 45 41.5 New Mexico 18 19Delaware 23 22 New York 43.9 42.3Dist. of Columbia 20 20 North Carolina 30.2 30.2Florida 31.9 27.9 North Dakota 23 23Georgia 26.3 26.3 Ohio 28 28Hawaii 31.8 44.1 Oklahoma 17 14Idaho 25 25 Oregon 24.9 24.3Illinois 37.4 45.6 Pennsylvania 32.3 39.2Indiana 31 41.7 Rhode Island 31 31Iowa 22 23.5 South Carolina 16.8 16.8Kansas 25 27 South Dakota 24 24Kentucky 18.5 15.5 Tennessee 21.4 18.4Louisiana 20 20 Texas 20 20Maine 28.3 28.6 Utah 24.5 24.5Maryland 23.5 24.3 Vermont 20 26Massachusetts 23.5 23.5 Virginia 19.6 18.1Michigan 35.2 32.7 Washington 34 34Minnesota 22 22 West Virginia 27 27Mississippi 18.8 18.8 Wisconsin 32.9 32.9

Wyoming 14 14

Marginal Cost Pricing

D

D

A

D

G

B

F1 F2

P’P

SRMC SRAC

LRAC

Implications of pricing

Social optimum – marginal benefit = marginal cost = price

Social costs of Improper pricing = AGF1F2

Increased Consumer surplus due to improper pricing = ABD

Net loss = AGD (dead weight loss)

Difficulties with pricing Privacy Estimating demand elasticities Distribution Effects

Unfairly penalizes low income individual and benefits the rich

Middle-class will be priced off the highway on transit, thus requiring better service and improving the welfair of the rich (still in cars) and the poor (using transit)

Pricing schemes Roadway user

Electronic tolls Physical toll facilities Area licensing

Vehicle use Parking charges On-vehicle meter Annual VMT Charges Fuel use taxes

Vehicle ownership based Vehicle sales taxes – purchasing fees License fees - registration

Regulatory schemes Direct capacity constraints

Traffic meters Direct use regulation

Hierarchical network use right Time and place restrictions Work force staggering Vehicle occupancy regulation

Land use regulation Parking supply restrictions Development density regulations Transit service area development