1. Demand Theory I
Meeghat Habibian

2. Consumer Demand

3. Example Agricultural center Industrial centerB
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

4. Example Agricultural center Industrial centerB
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

5. 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

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

7. 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.

8. 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

9. Demand vs. Traffic volume
Generalized cost

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

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

12. 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

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

14. 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)

15. 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

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

17. 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

18. Basic Assumptions in Consumer Demand Theory

19. 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.

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

21. 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

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

23. 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.

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

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

26. Finish