1. DEMAND THEORY III Meeghat Habibian Transportation Demand Analysis

2. Consumer Demand Function
Quantity of X1 depends on location of point M, this is in turn:
Budget level
Price of other goods (e.g., X2, X3, …, Xn)
Exact shape of indifference curves (i.e., U(x))
Transportation Demand Analysis – Demand Theory III

3. Demand Function?
Any relationship that would give quantity of Xi, in terms of:
Budget level
Price of other goods
Exact shape of indifference curves
Transportation Demand Analysis – Demand Theory III

4. Form of Demand Function
From the theory:
Explicit reference to U(x) could be eliminated Assuming the prices in demand function is suffice
Transportation Demand Analysis – Demand Theory III

5. Cost Consumption Curve
Shows relation between Xi and Pi, for fixed values of all other variables
It can derive from indifference map
by varying the cost of a normal good
Transportation Demand Analysis – Demand Theory III

6. Consumer Demand Function
Locus of all points, M
Transportation Demand Analysis – Demand Theory III

7. Elasticity 𝐸 𝑣 𝑋 = 𝑉 𝑋 𝜕𝑋 𝜕𝑉 Problem:
Derivative value depends on units in which V and X are measured.
Solution:
A dimensionless measure of change
Elasticity of X with respect to V, Ev(X):
The percentage change in X for a 1 percent change in V.
𝐸 𝑣 𝑋 = 𝑉 𝑋 𝜕𝑋 𝜕𝑉
Transportation Demand Analysis – Demand Theory III

8. Elasticity The sensitivity of demand with respect to a variable v:
𝑒 𝑣 = 𝜕𝑋/𝑋 𝜕𝑉/𝑉 = 𝜕 ln 𝑋 𝜕 ln 𝑉
Graphically: The slope of the demand curve if it were drawn on logarithmic scales
Valid only for small percentage changes.
Transportation Demand Analysis – Demand Theory III

9. Elasticity When ν is cost: Price elasticity
As price of a normal good increases by 1 percent, quantity consumed will decreases by ep
When ν is income: income elasticity
Transportation Demand Analysis – Demand Theory III

10. Elasticity Normal good: Income elasticity: Positive
Price elasticity: Negative
Inferior good:
Income elasticity: May be negative
Price elasticity: May be positive
Transportation Demand Analysis – Demand Theory III

11. Elastic Behavior (definition)
When the absolute elasticity is greater than unity.
Relatively elastic behavior:
When the absolute elasticity is less than unity .
Transportation Demand Analysis – Demand Theory III

12. Cross Elasticity
When demand function for a good contains explicit reference to another good.
Elasticity of the demand for good i with respect to the unit cost of good j
In transportation, cross elasticity is not limited to price.
Transportation Demand Analysis – Demand Theory III

13. Example (Direct vs. Cross elasticity )
Direct elasticity Ekk
Elasticity of the volume choosing mode k with respect to a change in the level of service of mode k.
Cross elasticity Ekr
Elasticity of the volume choosing mode k, Vk, with respect to a change in the level of service of competing mode r, Sr.
𝑬 𝒌𝒓 ≡ 𝑺 𝒓 𝑽 𝒌 𝝏𝑽 𝒌 𝝏𝑺 𝒓
Transportation Demand Analysis – Demand Theory III

14. Cross Elasticity
It can be expected positive due to the substitution effect.
If the price of one increases then the consumption of the other will also increase.
Transportation Demand Analysis – Demand Theory III

15. Example Consider: Utility function U=x1α1x2α2 Quantities: x1 and x2
α1 and α2: parameters
p1and p2 : unit prices
B budget limit
Transportation Demand Analysis – Demand Theory III

16. Example
Transportation Demand Analysis – Demand Theory III

17. Example P1/P2=(α1/x1)/(α2/x2).
These two demand functions exhibit unitary price elasticity and no cross-elasticity.
They do satisfy the budget constraint.
At optimality the ratio of the prices is equal to the ratio of the marginal utilities:
P1/P2=(α1/x1)/(α2/x2).
Transportation Demand Analysis – Demand Theory III

18. Notations
Not all demand functions are derived by maximizing utility functions subject to budget constraints because it is not in general possible to specify a utility function (i.e., this function is quantifiable only on an ordinal scale).
Specifying a priori forms of demand models and using empirical analysis to verify their validity is an alternative approach to demand modeling.
Transportation Demand Analysis – Demand Theory III

19. Empirical Demand Functions
The three most common forms in transportation demand:
linear
multiplicative
exponential
Hybrid forms combining any of these three are also to be found.
Empirical evidence is necessary for validation.
The choice must be based on a logical postulation of the causal relationships involved.
Transportation Demand Analysis – Demand Theory III

20. Linear Demand Function
Factors have independent additive effects:
T=α0+ α1p+ α2I
α0 ,α1 ,α2: coefficients
T: trip, P: cost, I: income
Effect of P on T (ðT/ ðP) is constant and equal to α1, independent of I.
Proportional effects (elasticities): ep=(ðT/T)/(ðP/P)=(P/T) α1
Transportation Demand Analysis – Demand Theory III

21. Multiplicative Demand Function
For example: T=α0Pα1Iα2
interaction between the effect of its variables
Effect of P on T :
This effect depends on value of T, hence it is not independent of value of I  p and I are interacting on it
The function can be linearized by logarithmic transformation
Transportation Demand Analysis – Demand Theory III

22. Multiplicative Demand Function
Elasticity with respect to any of variables, is constant.
For example, elasticity of T with respect to I:
eI=(∂T/T)/(∂I/I)=(∂T/ ∂I)/(T/I) =α2
Similarly, elasticity of T with respect to P is α1
ep=(∂T/T)/(∂P/P)= α1
Elasticities are constant and independent
This property led to widespread use in transportation
Therefore, this form is applied for simplification
Transportation Demand Analysis – Demand Theory III

23. Exponential Demand Function
Combines features of the two previous types.
It implies interaction between effects, and results in variable demand elasticities
Example:
The effect of I:
The elasticity of demand with respect to a variable p:
Transportation Demand Analysis – Demand Theory III

24. Exponential Demand Function
The postulation of demand elasticities proportional to the variables concerned is not uncommon in transportation applications (e.g., Entropy model in trip distribution)
A more common functional form, however, is the combined multiplicative and exponential function:
Transportation Demand Analysis – Demand Theory III

25. Transportation Demand Analysis – Demand Theory III
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