Demand Theory I

Consumer Demand

Example: Agricultural center Industrial center B No food Scenario 1: A mule track case Transportation with difficulty Loss & deterioration during journey A bit high price A few people can afford as merchant or customers

Example: Agricultural center Industrial center B No food Scenario 2: A established trail Transportation with horse-drawn carriages Travel time cut in half Reducing selling price in B Amount of traffic & customers increase

Example: Agricultural center Industrial center Scenario 3: A primitive road Transportation with small trucks Transportation of larger quantities Lower costs & selling price at B Amount of traffic and customers increase again A B No food

Example: Increasing traffic More selling amount at B System improving More selling amount at B Reduction in selling price

Example (Conclusion): One demand state but many traffic conditions. “Demand for transportation depends on type of transportation system” is wrong and demonstrates the danger of confusing traffic flow and demand.

Definition: Demand for transportation as a potential for traffic flow Demand vs. Traffic volume Definition: Demand for transportation as a potential for traffic flow cost

Demand vs. Traffic volume Generalized cost

Generalized cost Actual cost of transportation Value of time Deterioration of commodities Discomfort Inconvenience of journey

Demand vs. Traffic Volume Generalized cost ≡ resistance R Demand ≡ potential V - + Ω Actual amount of traffic ≡current I V=IR

Transportation demand is a derived demand Volume is affected by: Condition of the road Transportation cost Market for foodstuffs in B Transportation demand is a derived demand

Transportation Demand Relationship between the amount transported V and the cost of transportation CAB ? QB=Q(PB)

Transportation Demand QB=Q(PB) Define: VAB=Demand for transportation Price at B = price at A + transportation cost PB=PA+CAB QB=DB(PB)=DB (PA+CAB)=V(CAB)

Transportation Demand QB=DB(PB)=DB (PA+CAB)=V(CAB) Knowledge of the demand for goods Q(.) is sufficient to determine the demand For transportation However, the relationship between Q(.) and V(.) maybe more complex in realistic situations

Microeconomic Demand Theory Individual level: Consumer demand Individual traveler behavior levels Aggregate level: Market demand Behavior of total system Summing individuals

Consumer Demand Theory Interest on understanding and characterizing the factors that affect consumption behavior Decisions: Made by individuals or households Independent of others About the available commodities during a specific period of time

Basic Assumptions in Consumer Demand Theory:

Basic Assumptions 1-Consumer has a choice Consumer can vary: the amount of the various commodities consumed the amount of money out of the total budget.

Basic Assumptions 2-Every consumption give utility or satisfaction to the consumer. The utility is different for different consumers

Basic Assumptions 3-The consumer has a consistent preference structure based on the relative utilities For example: X, Y, Z Preference of X over Y and Y over Z directly implies the preference of X over Z

Basic Assumptions 4-The consumer is assumed to be insatiable Given the choice between two quantities of the same goods consumer opt larger.

Basic Assumptions 5-Choice of consumer is limited by a budget constraint Not unlimited supply nor unlimited choice. Consumer will choose a combination of goods that maximize their utility in presence of budgetary constraints.

Basic Assumptions 6-The consumer has full information about the goods

Goods Classification: Competitive goods Where a choice truly exists between consumption alternatives. Choice between automobile trip & bus trip Complementary goods Air trip and airport access trip