Economic - Demand Supply Market Equilibrium Final 112012

7/28/2019 Economic - Demand Supply Market Equilibrium Final 112012

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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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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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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.




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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


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


Unitcost(#

/trip)

0

10

20

30

100 200 300 400

Travel demand curve


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


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


Unitcost(#

/trip

)

[1] Tax payments

0

10

20

30

100 200 300 400


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


Unitcost(#

/trip

)

Supply curve

0

10

20

30

100 200 300 400

Demand curve


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


Unitcost(#

/trip)

197

12.5

Supply curve

40

0

10

20

30

100 200 300 400

Old demand curve


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


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


Unitcost(#

/trip)

197

12.5

Supply curve

40

0

10

20

30

100 200 300 400

Travel demand curve


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


0

10

20

30

100 200 300 400

Old demand curve

Unitcost(#

/trip

)


40


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


0

10

20

30

100 200 300 400

Old demand curve

U

nitcost(#

/trip)


40


8.3

0

10

20

30

100 200 300 400

40

227

15.0

New demand curve

302


0

10

20

30

100 200 300 400

Old demand curve

U

nitcost(#

/trip)


40


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

Documents

Economic - Demand Supply Market Equilibrium Final 112012