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MIT1_201JF08_lec12

# MIT1_201JF08_lec12 - Pricing of Transportation Services...

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Pricing of Transportation Services: Theory and Practice I Moshe Ben-Akiva 1.201 / 11.545 / ESD.210 Transportation Systems Analysis: Demand & Economics Fall 2008

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Outline This Lecture: Introduction, Review of cost and demand concepts – Public sector pricing in theory – Issues with marginal cost pricing – Congestion pricing in theory Next Lecture: – Congestion pricing in practice – Public Sector pricing in practice – Private sector pricing in theory and in practice 2
Introduction to Pricing Tool: Determining prices for provided services Objective: Maximize the economies of a system – Public sector: welfare – Private sector: profit To quantify welfare and profit, need to understand demand and cost 3

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Review of Cost Concepts Total, Average, and Marginal Costs Total cost: C ( Q ) Average cost: AC ( Q ) Marginal cost: MC ( Q ) 4
Review of Cost Concepts (cont.) Other Concepts Cost Fixed and variable costs Variable Cost Q Fixed Cost Total Cost AC AC 3 AC 4 Short-run and long-run costs Q AC 1 AC 2 LAC 5

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Review of Demand Concepts Demand Function and Price Elasticity Demand function Q = D(p) Q = D(p q , p r , p s , …) complements, substitutes Demand price elasticity E Q |p = ln Q / ln p = ( Q / p) * p / Q where p q is the price of a unit of output and p r and p s are unit prices of complements and substitutes, respectively. 6
Review of Demand Concepts (cont.) Revenue Elasticity Revenue = R = p Q % change in revenue R/R Revenue arc elasticity = = % change in price p/p R p = (p Q ) p = Q + p Q 1 = 1 + Q p E R|p = p R p p Q p Q p Q E R|p = 1 + E Q |p Example: if the demand price elasticity is –1.5 then a 10% price increase would result in a 5% revenue decline 7

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Review of Demand Concepts (cont.) Elastic and Inelastic Demand Elastic demand: decrease price to increase revenue Inelastic demand: increase price to increase revenue Unit Elastic Demand Elastic Demand Inelastic Demand E Q |p -1 0 8
Review of Demand Concepts (cont.) Inverse Demand Function p (\$ /u nit) p = D 1 ( Q ) Q (u nits) D -1 represents the willingness to pay for a given consumption level. It is a measure of marginal social benefit 9

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Outline Introduction, Review of cost and demand concepts Public sector pricing in theory Issues with marginal cost pricing Congestion pricing in theory 10
Public Sector Pricing Basic idea: social marginal cost pricing – Set price to maximize net “welfare” – What is welfare? Total social benefits (B) – Total social costs (C) – What are social costs? – What are social benefits? – Both depend on price through quantity consumed

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MIT1_201JF08_lec12 - Pricing of Transportation Services...

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