Notes On Transportation Demand

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Transportation Demand

D E P A R T M E N T OF O P E R A T I O N A L S C I E N C E S
G RAD UAT E S C H O O L O F E N G I N E E R I N G AN D MANAG E M E N T

SUPPLY & DEMAND
$/X
S

D
X/t

D E P A R T M E N T OF O P E R A T I O N A L S C I E N C E S
G RAD UAT E S C H O O L O F E N G I N E E R I N G AN D MANAG E M E N T

Increase in Demand
$/X
S

D2
D
X/t

D E P A R T M E N T OF O P E R A T I O N A L S C I E N C E S
G RAD UAT E S C H O O L O F E N G I N E E R I N G AN D MANAG E M E N T

Decrease in Demand
$/X
S

D2

D
X/t

D E P A R T M E N T OF O P E R A T I O N A L S C I E N C E S
G RAD UAT E S C H O O L O F E N G I N E E R I N G AN D MANAG E M E N T

Effect of Price Change
$/X

P1

A

B

P2

D
X1

X2

X/t

D E P A R T M E N T OF O P E R A T I O N A L S C I E N C E S
G RAD UAT E S C H O O L O F E N G I N E E R I N G AN D MANAG E M E N T

Non Price Determinants of Demand
• Income
• Tastes & Preferences
• Price of Related Goods
• Population or number of consumers
• Expectations
• NOT PRICE- changes in price have no effect on demand
D E P A R T M E N T OF O P E R A T I O N A L S C I E N C E S
G RAD UAT E S C H O O L O F E N G I N E E R I N G AN D MANAG E M E N T

EQUILIBRIUM
$/X
S surplus P1
Pe

D
Qd

Qe

Qs

X/t

D E P A R T M E N T OF O P E R A T I O N A L S C I E N C E S
G RAD UAT E S C H O O L O F E N G I N E E R I N G AN D MANAG E M E N T

EQUILIBRIUM
$/X
S

Pe shortage D
Qs

Qe

Qd

X/t

D E P A R T M E N T OF O P E R A T I O N A L S C I E N C E S
G RAD UAT E S C H O O L O F E N G I N E E R I N G AN D MANAG E M E N T

Transportation Demand
• Demand for transportation is derived demand • Demand is dependent upon demand for items to be transported
• No primary demand for transportation
• Difficult to forcast derived demand
• Carriers must be sensitive to conditions in final product markets
D E P A R T M E N T OF O P E R A T I O N A L S C I E N C E S
G RAD UAT E S C H O O L O F E N G I N E E R I N G AN D MANAG E M E N T

Types or levels of
Demand
• Total or Market demand
– demand for transportation in general

• Modal demand
– i. e., demand for rail, demand for trucks

• Firm demand
– demand for individual carrier; demand for Yellow Freight, or demand for BNSF
D E P A R T M E N T OF O P E R A T I O N A L S C I E N C E S
G RAD UAT E S C H O O L O F E N G I N E E R I N G AN D MANAG E M E N T

Elasticity of Demand
• Sensitivity measurement
– how sensitive or responsive is quantity demanded to changes in price

• Normally talking about price elasticity of demand
– can have income elasticity, or elasticity between any two related variables

• Defined as percentage change in quantity demanded divided by percentage change in price
D E P A R T M E N T OF O P E R A T I O N A L S C I E N C E S
G RAD UAT E S C H O O L O F E N G I N E E R I N G AN D MANAG E M E N T

Elasticity = %  Qd/% 
P
• number is always negative
• if < 1 then inelastic
• if > 1 then elastic
• if = 1 then unitary elastic
• P & TR vary directly with inelastic
• P & TR vary inversely with elastic
• P & TR don’t change with unitary


D E P A R T M E N T OF O P E R A T I O N A L S C I E N C E S
G RAD UAT E S C H O O L O F E N G I N E E R I N G AN D MANAG E M E N T

Determinants of
Elasticity
• Substitutability
• Proportion of income (high/low price) • Luxury vs. necessity
• Time
• Market vs. modal vs. firm
D E P A R T M E N T OF O P E R A T I O N A L S C I E N C E S
G RAD UAT E S C H O O L O F E N G I N E E R I N G AN D MANAG E M E N T

Transportation Costs

D E P A R T M E N T OF O P E R A T I O N A L S C I E N C E S
G RAD UAT E S C H O O L O F E N G I N E E R I N G AN D MANAG E M E N T

Classification of Costs
• Fixed vs variable
– time dependent

• Sunk vs avoidable
• Cost traceability
– common
– joint

• Linehaul vs terminal
D E P A R T M E N T OF O P E R A T I O N A L S C I E N C E S
G RAD UAT E S C H O O L O F E N G I N E E R I N G AN D MANAG E M E N T

Cost Allocation
• Problem is with fixed costs
• Allocation mechanism and which costs
are
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