Estimation of

Transportation
Demand-II
CEL 442: Traffic and Transportation Planning

K. Ramachandra Rao

Traffic and Transportation Planning

Outline

Transportation Supply

Equilibration of Transportation Demand

and Supply

Elasticity of Transportation Demand

Consumer Surplus and Latent Demand

Demand Analysis

The UTMS - Steps

1.

Trip Generation:
What generates the trips? Trip productions.

2. Trip Distribution:
For the trips generated, how are they distributed (shared) among the
various destination points?

3. Traffic Assignment
Which routes are taken by the travelers from any origin to any
destination?

4. Mode Choice or Mode Split

For a given set of travelers on each chosen route, what fraction takes
which mode (car, bus, walk, rail, air, etc.)

Estimating Transportation Demand

Elements of Transportation Supply

Quantity
no. of highway lanes,
rail tracks
Size of runway area,
harbor area, etc.
Capacity of
transportation
facilities

Quality
Traveling comfort, safety,
convenience, etc.
Non-physical systems and
operational features that
increase facility capacity
(ITS initiatives, etc.)
Can help increase the flow of
traffic even when the
physical capacity is constant
4

Estimating Transportation Demand

How to Estimate Transportation Supply

Transportation Supply
The quantity (or quality) of transportation facilities that
facility producers are willing to provide under a given set
of conditions.

Supply functions or supply models

Mathematical expressions that describe transportation
supply.
S = f(X1, X2, Xn)
S

Trip Price

p2

p1

V1

V2

Quantity Supplied

Estimating Transportation Demand

Trip Price

p2

p1

V1

V2

Quantity Supplied

When trip price increases, the supply of transportation services

increases

When trip price decreases, the supply of transportation service

decreases

In classical economics, this is known as The Law of Supply

Shifts in the Supply Curve

A change in supply can occur even when the price is

constant
SB

SA

Trip Price

V2

V1

Quantity Supplied

Causes of shifts in supply curve

Number of competing transportation modes that are available
Changes in prices of using any alternative transportation modes)
Changes in technology

Shifts in the Supply Curve

A change in supply can occur even when the price is constant

SC

SA
Trip Price

V1

V2

Quantity Supplied

Causes of shifts in supply curve

Number of competing transportation modes that are available
Changes in prices of using any alternative transportation modes)
Changes in technology
8

Estimating Transportation Demand

Demand-Supply Equilibration
Facility Supply
Socio-economic Activities
Going to/from work
Going to/from school
Leisure/Entertainment
Visiting restaurants

Transportation

Shopping

Demand

Meetings
Etc.

Demand

Flow

and
Supply
Equilibration

of
Traffic

Estimating Transportation Demand

An Instance of Demand-Supply Equilibration How it happens

Trip
Price (p)

p*

Quantity (V)
V*

Demand function: fD(p,

V)

Supply Function: : fS(p,

V)

At equilibrium, Demand = Supply

fD(p, V) = fS(p, V)

Solving simultaneously, we get:

p = p* (equilibrium trip price) and V = V* (equilibrium demand)

10

Estimating Transportation Demand

Demand-Supply Equilibration Example 1 (Rail transit)

Trip
Price (p)

VD = 5500 -22p

p = 1.50 + 0.003VS

p*

Demand function
V = 5500 - 22p

Quantity (V)
V*

Supply function
p = 1.50 + 0.0003 V

Solving the above 2 equations simultaneously yields: the

demand/supply equilibrium conditions
V = 5,431 passengers daily
P = Rs.3.13 fare (trip price) per passenger

11

Demand-Supply Equilibration Example 2 (Air Travel)

Supply Function
price per seat = 200 + 0.02*(no. of airline seats sold per day)
p = 200 + 0.02*q
Demand Function
No. of seats demanded per day = 5000 - 20 (price per seat)
q = 200 + 0.02*p
Solving simultaneously .
Equilibrium price, p* = Rs.214.28
no. of seats demanded and sold at equilibrium, q* = 714

12

Demand-Supply Equilibration Example 3 (Freeway travel)

Supply Function
Travel Time

Travel Time = 15 + 0.02*traffic volume

t = 15 + 0.02*q
Traffic Supply Function

Demand Function

27.94
mins

Traffic volume = 4,000 120* Travel time

q = 4000 - 120*t
Traffic Demand
Function

Equilibrium conditions:
Travel time = 27.94 mins.
Traffic Volume = 647 vehs/hr
647 veh/hr

Traffic Flow

13

Estimating Transportation Demand

Recall Demand-Supply Equilibration

Facility Supply
Socio-economic Activities
Going to/from work
Going to/from school
Leisure/Entertainment
Visiting restaurants

Transportation

Shopping

Demand

Meetings
Etc.

Demand
and
Supply
Equilibration

14

Estimating Transportation Demand

Demand-Supply Equilibration Series of Instances

Socioeconomic
Activities

Going to/from work

Going to/from school

Facility Supply

Leisure/Entertainment
Visiting restaurants
Shopping

Transportation
Demand

Meetings
Etc.

Demand
And Supply
Equilibration
Change in Facility Supply
Demand
And Supply
Equilibration

Change in
Transportation
Demand

Demand
And Supply
Equilibration

Change in
Transportation
Demand

15

Estimating Transportation Demand

Demand-Supply Equilibration A Series of 3

Instances (Graphical Illustration)
SOLD
Trip
Price (P)

DNEW
DOLD
SNEW

P1
P2

P0

Quantity V
V0

V1

V2

Hence:
Equilibration occurs continually, because of the dynamic nature of
socio-economic activity and transportation decisions.
16

Demand supply equilibrium

Supply and Demand comprise the economists view of

transportation systems. They are equilibrium systems
This means that system is subject to negative feedback: - an
increase in demand results in decrease in cost of service
(supply), and an increase in cost of service results in
decrease of demand

17

Disequilibrium

Many elements of the transportation system do not necessarily

generate an equilibrium
Increase in traffic demand results in increase of fuel cess; the
increase in fuel surcharge (cess) generates more fund in National
Road Fund (NRF), India, which in turn results in more road building,
this further increases traffic demand; This is a positive feedback,
virtuous cycle
Similarly one might have a, vicious cycle, where decrease in
demand results in decrease in transit supply, this would further cut
the services and so on.

18

Elasticity of Demand

Definition:

Proposed by Alfred Marshall, in 1881 while sitting on his roof

Change in demand in response to a unit change in a demand
factor or service (supply) attribute, X

Demand factors and service attributes include:

Price
Total trip price
Parking price
Fuel price
Congestion price (price for entering the CBD)
Transit fare, etc.

Travel Time
Trip comfort, safety, convenience, etc.

Mathematical formula: (which is generally denoted with

the Greek letter epsilon )
Change _ in _ demand
eV , X =

Original _ demand
Change _ in _ x
Original _ value _ of _ x

V / V
= ( X / V )(V / x )
X / x
19

Elasticity of Demand
eV , x = ( X / V )(V / x )
Obviously, the actual expression for eVx will depend on the functional
form of the demand model V as a function of x, as seen in table below
Shape of Demand Function

Linear
V = + X
Product
V = X
Exponential
V = eX
Logistic

V =

1 + e X

Logistic-Product

V =

1 + X

Source: Manheim, 1979

Elasticity Function
(X/V) (V/X)
e=

X
V

1
1 + ( / X )

e=
e = X
X
V
Xe

e = X 1 =
1 + e X

e = 1 =
1 + X

20

Point Elasticity vs. Arc Elasticity

Factor or
Attribute, x

V=f(x)

Factor or
Attribute, x

V=f(x)

x*
x0
x1
V*=f(x*)

Quantity of trips demanded, V

V0

Point Elasticity

dV / V dV x
x*
=
=
= f ' ( x*)
dx / x
dx V
f ( x*)

V1

Quantity of trips
demanded, V

Arc Elasticity

(
V1 Vo )( x1 + x0 ) / 2
=
(x1 xo )(V1 + V0 ) / 2
(
f ( x1 ) f ( xo )(x1 + x0 ) / 2
=
(x1 xo )( f ( x1 ) + f ( x0 ) ) / 2
21

Example of Point Elasticity Calculation

An aggregate demand function for a rail transit service from a suburb to
downtown is represented by the equation V = 500 20p2, where V is
the number of trips made per hour and p is the trip fare.
At a certain time when the price was Rs.1.50, 2,000 trips were made.
What is the elasticity of rail transit demand with respect to price?

Solution:
V / V V p
e
(
V
=
)
=

Point price elasticity = p

p / p p V

= (-20)(2)(1.50)(1.50/2000) = - 0.045

22

Example of Arc Elasticity Calculation

Two years ago, the average air fare between two cities was Rs.1,000
per trip, 45,000 people made the trip per year. Last year, the
average fare was Rs.1,200 and 40,000 people made the trip.
Assuming no change in other factors affecting trip-making (such as
security, economy, etc.), what is the elasticity of demand with
respect to price of travel?
Solution:
Arc price elasticity, ep =
V ( p1 + p2 ) / 2 (45,000 40,000) (1,000 + 1,200) / 2
=
= 0.647
p (V1 + V2 ) / 2 (1,000 1,200) (45,000 + 40,000) / 2

23

Interpretation of Elasticity Values

Perfectly Inelastic
Perfectly Inversely
Elastic

-1

-
Elastic, Inverse

Perfectly Directly
Elastic

Inelastic

Inelastic

Elastic, Direct

A unit increase in x
results in a very
large decrease in
demand, V

A unit increase in x
results in a very
large increase in
demand, V
A unit increase in x
results in a very small
decrease in demand, V

A unit increase in x
results in a very small
increase in demand, V
A unit increase in x results
in NO change in decrease
in demand, V

24

Interpretation of Demand Elasticity Values - Example:

When the fare, p, on a bus route was Rs.1, the daily ridership, q, was 2000. By reducing the fare
to Rs.0.50, the ridership increased by 600. What is the elasticity of demand with respect to trip
fare?
Solution:

e=

(q1 qo )(p1 + p 0 ) / 2
(p1 p o )(q1 + q0 ) / 2

e=

(1 + .5) / 2 = 0.39
600

0.5 (2000 + 2600 ) / 2

Perfectly Inelastic
Perfectly Inversely
Elastic

-1

-
Elastic, Inverse

Perfectly Directly
Elastic

Inelastic

Inelastic

Elastic, Direct

Because the resulting elasticity is less than 1.00, the demand is considered inelastic.
25

Applications of the Concept of Elasticity

Prediction of expected demand in response to a change in trip

prices, out-of-pocket costs, fuel costs, etc. Thus helps in evaluating
policy decisions.

For transit agencies, elasticities help predict the expected change in

demand (and therefore, predict expected change in revenue) in
response to changes in transit service attributes (trip time, safety,
comfort, security, etc). Thus helps agencies examine the potential
impact of their transit investment (enhancements) or increases or
decreases in transit fare.

Elasticities therefore are generally useful for evaluating the impact

of changes in transportation systems on travel demand.
26

Applications of the Concept of Elasticity (contd)

Prediction of revenue changes
How does demand elasticity affect revenues from fare-related
transportation systems?
Elasticity of transit demand with respect to price is given by:

e=

% change in ridership
% change in price

If e > 1, demand is elastic increase in price will reduce revenue decrease in price will increase revenue
e < 1,

opposite effect on revenue

e = 1,

revenue will remain the same irrespective of the change in price

27

Example 1:
The demand for a certain transit system is governed by the power
functional form q = (p)
The agency is considering increasing the transit fare to 70 cents.
If ep = -2.75, q0 = 12,500/day, p0 = Rs.0.50, p1 = Rs.0.70
What policy should be adopted (Should p stay as it is or should be
increased to Rs 0.70)?
Solution

q = (p )

& are model parameters (i.e., constants)

is the elasticity of demand (q) with respect to an attribute (p)
dq
= p 1
dp
dq p
1 p
e p = = p
= p 1 p q 1 =
dp q
q
Thus, it can be seen that for the power form: the exponent of the price variable is the price elasticity

28

Solution (continued)

q = p
12,500 = (50 )

2.75

= 5.876 10 8
For p = Rs 0.70, q = 4,955
Loss of ridership = 12,500 4,955 = 7,545
Loss of revenue = 12,500 x 0.5 -4,955 x 0.7 = Rs.3,406 daily.

Clearly, the loss in transit demand due to the price increase will lead to a
very large reduction in revenue that will not be offset by the increase in
transit fare.
So the agency should not increase the transit fare.

29

Elasticity of Supply

The elasticity of supply is analogous to the elasticity of demand, in

that it is a unit-free measure of the responsiveness of supply to a
price change
It is defined as the percentage increase in quantity supplied resulting
from a small percentage increase in price (the elasticity of supply,
denoted (the Greek letter eta) or equivalent h
Change _ in _ sup ply
hS , X =

Original _ sup ply

Change _ in _ x
Original _ value _ of _ x

S / S
= ( X / S )(S / x )
X / x

Again similar to demand, if supply takes the form S(x)=axh, then

supply has constant elasticity, and the elasticity is equal to h.
A special case of this form is linear supply, which occurs when the
elasticity equals one.

30

Direct and Cross Elasticities

Direct Elasticity the effect of change in the price of

a good on the demand for the same good.

Cross Elasticity the effect on the demand for a

good due to a change in the price of another good.

31

1. Direct and Cross Elasticities

Direct Elasticity the effect of change in the price of a good on the demand for
the same good.
Cross Elasticity the effect on the demand for a good due to a change in the
price of another good.

Demand for car Travel

Demand for Bus Transit Travel

Parking Price
Travel Time
Fuel

Transit Fare
Travel Time
Safety

32

Examples of Direct Elasticities

Direct Elasticity the effect of change in the price of a good on the

demand for the same good.
Cross Elasticity the effect on the demand for a good due to a
change in the price of another good.

Demand for car Travel

Demand for Bus Transit Travel

Parking Price
Travel Time
Fuel

Transit Fare
Travel Time
Safety

33

Examples of Cross Elasticities

Direct Elasticity the effect of change in the price of a good on the demand for the same good.

Cross Elasticity the effect on the demand for a good due to a

change in the price of another good.

Demand for car Travel

Demand for Bus Transit Travel

Parking Price
Travel Time
Fuel

Transit Fare
Travel Time
Safety

34

Examples of Cross Elasticities

Direct Elasticity the effect of change in the price of a good on the demand for the same good.

Cross Elasticity the effect on the demand for a good due to a

change in the price of another good.

Demand for car Travel

Demand for Bus Transit Travel

Parking Price
Travel Time
Fuel

Transit Fare
Travel Time
Safety

35

Example 1:
A 15% increase in gasoline price has resulted in a 7% increase in bus
ridership and a 9% decrease in gasoline consumption.
p0 = gasoline price before
p1 = gasoline price after
B0 = Bus ridership before
B1 = Bus ridership after

36

Cross Elasticity
p1 = p0 x 1.15

dB 0.07
(1 + 1.07 )
B
= 0.48
e=
=
dp 0.15
(1 + 1.15)
p

37

Example 2:
The demand for a certain bus transit system is given by:

q=T

0.3 0.2

0.1 0.25

A I

Where:
q = transit ridership/hr
T = transit travel time (hrs)
p = transit fare (Rs.)
A = cost of car trip (Rs.)
I = average income (Rs.)

38

Question (a):
When q0 = 10,000/hr, p = Rs.1. ep = -0.2. What is q1 when p = Rs.0.9?
Also, what is the gain in revenue?

Solution
ep = -0.2

1% reduction in fare 0.2% increase in ridership

Fare reduction = (100-90)/100 = 10%

Corresponding increase in ridership = 2%
New demand = q1 = 200 + 10,000 = 10,200/hr
Revenue Gain = 10,200 x 0.9 10,000 x 1= -Rs.820/hr

39

Question (b). Current car trip cost Rs.3 (including parking). The cross elasticity of transit
demand with respect to car cost is 0.1. If the parking charge were raised by 30 cents, the impact
on transit ridership?

Solution:
car cost cross elasticity = 0.1
30 cents/Rs.3

10% increase in car cost

Ridership increase

1%

addl. 100 riders / hr

40

Question (c). Average income of travelers Rs.15,000/yr. Income elasticity is -0.25. What additional
income is necessary to offset the car cost increase?

Solution:
1% increase in income

0.25% decrease in ridership

eI = 0.25 =

dq dI
dI
/
=
.
01
/
q I
I

dq
= 1%
q

dI .01
=
= 0.04 4%
I 0.25
An increase in income of 4% (15,000 x .04 = Rs.600) would cover a 30 cent increase (10% increase) in car
cost. That means a Rs.600 income increase would prevent 100 riders from switching to transit.

41

Recall Factors that Affect Demand

Demand factors and service attributes include:

Price
Total trip price
Parking price
Fuel price
Congestion price (price for entering the CBD)
Transit fare, etc.

Travel time
Trip comfort, safety, convenience, etc.
Research has established some values of elasticity
42

2. Some Elasticity Values

Demand Elasticities with respect to Parking Price, by Mode

Source: TRACE (1999)

43

Some Elasticity Values

Estimated Fuel Price Elasticities by Mode and Fuel Type

Short Run Elasticity

Long Run Elasticity

Low

Base

High

Low

Base

High

Road Gasoline

-0.10

-0.15

-0.20

-0.40

-0.60

-0.80

Road Diesel - Truck

-0.05

-0.10

-0.15

-0.20

-0.40

-0.60

Road Diesel - Bus

-0.05

-0.10

-0.15

-0.20

-0.30

-0.45

Road Propane

-0.10

-0.15

-0.20

-0.40

-0.60

-0.80

Road CNG

-0.10

-0.15

-0.20

-0.40

-0.60

-0.80

Rail Diesel

-0.05

-0.10

-0.15

-0.15

-0.40

-0.80

Aviation Turbo

-0.05

-0.10

-0.15

-0.20

-0.30

-0.45

Aviation Gasoline

-0.10

-0.15

-0.20

-0.20

-0.30

-0.45

Marine Diesel

-0.02

-0.05

-0.10

-0.20

-0.30

-0.45

Source: Hagler Bailly (1999)

44

Some Elasticity Values

Transit Demand Elasticities (wrt to Fare) by Time-of-Day and City Size

Average for All Hours

Peak Hour
Off-Peak
Off-peak Average
Peak Hour Average

Large Cities (More than

One Million Population)
-0.36
-0.18
-0.39

Smaller Cities (Less than

One Million Population)
-0.43
-0.27
-0.46
-0.42
-0.23

Kain and Liu (1999)

45

Consumer Surplus - Conceptual Illustration

Consider you go to the mall and you see a flashy

new smart phone

Display price is Rs. 25,000

But you like it (or need it) so much that you are even
prepared to pay Rs. 30,000 for it

Your individual consumer surplus = Rs. 5,000 (=

25,000-30,000)

Others may have a CS that is less or more than

yours.

Lets say the average consumer surplus of potential

buyers is Rs.2,500.

What does this tell the producer?

46

Consumer Surplus In the Context of

Transportation Demand

Existing transit fare is p Rupees.

Some people are prepared to pay up to q Rupees for the trip,

where q > p

Then, maximum consumer surplus = q - p

minimum consumer surplus = 0
the average consumer surplus = ((q - p) + 0) / 2
= 0.5(q - p)

For all the travelers that demand that trip at equilibrium conditions,
VP*, the total consumer surplus is
= VP* 0.5(q - p) = 0.5 VP* (q - p)

If consumer surplus is large, what does that tell the transit service
provider?
47

Unit Trip
Price, p

Consumer Surplus

Supply Function

p-q
p

Demand
Function
Quantity of Trips demanded, V
0

Vp*

Vp0

Consumer surplus = 0.5VP*(q - p)

48

Change in Consumer Surplus

A change in transportation supply (e.g., increased quantity, increased capacity, increased quality of
service (comfort, safety, convenience, etc.) can lead to a change in the consumer surplus.

Unit
price, p

S1 = Existing Supply Curve

S2 = Supply Curve after improvement
p1
p2

V1

V2

The change in consumer surplus, which is a measure of the beneficial impact of the
improvement, is given by:

= ( p1 p2 )V1 +

1
( p1 p2 )(V2 V1 )
2

= ( p1 p2 )(V1 + V2 ) / 2 49

Consumer Surplus - Example:

Urban bus service
Current: 100 @ 40 capacity buses, 90% load factor
fare Rs.1
Proposed: 20% increase in fleet size
95% load factor
fare Rs.0.9
Calculate the change in consumer surplus.
Determine if there is a revenue gain.

50

Solution

Existing situation

Fare (Rs.)
1.0

q1 = 100 buses x 40 seats

Consumer Surplus

x 0.9 (load factor)

= 3600 persons/hr
0.8

Rev = 3600 x Rs.1

= Rs.3600/hr

0.4

2000

4000

6000

q (persons/hr)

51

Proposed Situation
q2 = 120 buses x 40 seats x 0.95 (load factor)
= 4560 persons/hr
Rev = 4560 x 0.9
= Rs.4140/hr

Change in Consumer Surplus

= (1.0 0.9)(3600 + 4560)/2
= Rs.408/hr
Rev Gain = (4140 -3600) = Rs.504/hr

52

Latent Demand - Conceptual Illustration

Again, consider you go to the mall and you see that flashy
new smart phone

price is Rs. 25,000

Assume the producer is willing to give it out free to anyone

who is interested.

How many people would demand it?

This is the latent demand.

What does this tell the producer? Gives indication of

demand under pro-bono conditions.

Useful for sales promotions of the good (example, free good

for limited period to help advertise)

Useful for sales promotion of complementary goods (e.g., free

phone but you pay for the service.)
53

Latent Demand In the Context of Transportation

Demand

Existing transit fare is p Rupees.

On the average, VL people are prepared to use the transit

service if it were free-of-charge.

Then the latent demand is VL Vp*

where VP* is the demand at equilibrium conditions,

54

Unit Trip
Price, p

Supply Function

p*

Demand
Function
Quantity of Trips demanded, V
0

Vp*

VL

Latent demand

Latent demand = VL VP*

55

Traffic and Transportation Planning

References

Meyer, MD and Miller, EJ (2001), Urban Transportation Planning,

McGraw Hill, 2nd Edition
Ortuzar, JD and Willumsen, HCW (2001) Modelling Transport, John
Wiley, 3rd Edition
Papacostas, CS, and Prevedouros, PD (2001) Transportation
Engineering and Planning, Prentice-Hall, 3rd Edition
Mannering, FL, Kilareski, WP and Washburn, SC (2005) Principles of
Highway Engineering and Traffic Analysis, John Wiley, 3rd Edition.
Khisty, CJ, and Lall, B.K. (2003) Transportation Engineering: An
Introduction, Prentice-Hall of India, New Delhi, 3rd Edition
Manheim, ML (1979) Fundamentals of Transportation Systems
Analaysis, Vol I, The MIT Press, Cambridge
Sinha, K.C., Labi. S (2007) Transportation Decision Making
principles of project evaulation and programming, John Wiley, New
Jersey

Demand Analysis

56