May 12 2008
Is bicycle transportation an “inferior good”?
Published by Jason Welker at 11:33 pm under
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WikipediaThe Associated Press: Gas prices knock bicycle sales, repairs into higher gear
Greg Mankiw has an ongoing series of posts linking to articles illustrating the impact that rising gas prices have had on demand in markets other than that of the automobile.
The concept of cross-price elasticity of demand measures the responsiveness of consumers of one good or service to the change in price of another. As gas prices rise, drivers tend to switch from automobiles to alternative forms of transportation. A few days ago I blogged about the switch from tractors to camels in India, one illustration of the concept of cross-price elasticity of demand. Mankiw has so far linked to articles about the impact of high gas prices on demand for bicycles, small cars and mass transit.
These three “goods” are all substitutes for the most common form of transport among Americans, the private automobile (often times a gas-guzzler in “the bigger the better” America). The principle of cross-price elasticity of demand says that when the price of a good like personal vehicular transport becomes more expensive (in this case due to the price of an input required in private cars, gasoline), the demand for a substitute good will increase.
In the case of bicycles, evidence indicates that just such a change in demand is already underway in America today:
Bicycle shops across the country are reporting strong sales so far this year, and more people are bringing in bikes that have been idled for years, he said.
“People are riding bicycles a lot more often, and it’s due to a mixture of things but escalating gas prices is one of them,” said Bill Nesper, spokesman for the Washington. D.C.-based League of American Bicyclists.
“We’re seeing a spike in the number of calls we’re getting from people wanting tips on bicycle commuting,” he said.
Interestingly, the increase in demand for bicycle travel in response to high gas prices might be even more pronounced due to America’s sluggish growth, 4% inflation and rising unemployment. Real wages have seen little gain in the last couple of years as growth has fallen close to zero while prices have continued to rise. It may be possible that a fall in real incomes in America has spurred new demand for bicycle transportation, which could be considered an inferior good, meaning that as household incomes fall, consumers demand more bicycles for transportation.
Since bicycles represent such a drastically cheaper method of transportation, high gas and food prices, a weak dollar, and falling real wages accompanying the economic slowdown have had a negative income effect on American consumers, leading to increases in demand for inferior goods such as bicycle transportation
That said, having worked in a bike shop myself for two years in college, I can say that most consumers looking at new bicycles are not doing so because of falling incomes. Quite the opposite, in fact, indicating that new bicycles are normal goods (those for which as income rises, demand rises). However, the article states that in addition to increases in new sales, “more people are bringing in bikes that have been idled for years”.
It may be that while new bicycles themselves are normal goods, bicycle transportation as a whole is an inferior good. The increase in demand for new bicycles could be explained by the substitution effect (as the price of motor vehicle transportation rises, its substitute, bicycle transport, becomes more attractive to consumers) and at the same time explained by the income effect too (as real incomes have fallen, demand for the bicycle transport has risen).
This phenomenon is an excellent illustration of how the income and substitution effects work in conjunction to explain the inverse relationship between price and quantity demanded for automobiles (the law of demand), as well as the concept of cross-price elasticity of demand between two substitute goods.
About the author: Jason Welker is a teacher at Zurich International School in Switzerland, where he teaches Advanced Placement and International Baccalaureate Economics. Jason was an international school student in Malaysia before studying economics at Seattle University then earning his Masters in Education. He calls Seattle and Northern Idaho home. In addition to maintaining an economics wiki and this blog for economics student and educators, Jason also gives presentations on using Web 2.0 tools in education at workshops and conferences around the world. His economics wiki won the 2007 "Best Educational Wiki" award from the "EduBlog Awards". 
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It seems to me the relationship between bike commuting and auto commuting must be more complex. I’d agree bikes and bike commuting are different goods–and dependent in some way; e.g. you cannot shift from auto to bike transportation if you don’t already own a bike. Also “bike commuting” runs a very wide range of income levels…many people bike commute because they cannot afford to own a car. Others, like me, are fanatics who ride a fixed gear bike 25 miles round trip from the suburbs into Boston wearing lycra and spandex.
You also need to consider how availability of other modes of transit factors in…I can choose to drive and park ($11 to park, approximately $8 gas), or walk 3/4 mile to a $10.50 train ride, or drive to a $3 lot and $10 train, or bike to a $10 train. Additionally, there are the costs of frustration and aggravation with driving, frustration and delay (train), extreme aggravation at missing train, crisis of not being able to get home from work quickly (train), and delay/aggravation of flat tire or bike crash.
Few of these costs are as predictable as gas and parking; e.g. weather unpredictability and inconvenience also plays a role. So for me, the choice of bike, train or car is complicated, but usually boils down to an issue of time and schedule + weather, more than gas cost. But I am an edge case! It would be interesting to see if an economic model could sort out the “noise” in all that to make any generalizations. Most people don’t have as many options as I do, so I think in some cases the increasing gas costs could be isolated and perhaps would tip some people into investigating alternatives.
… and if you use a unicycle instead of a bicycle then you only use half the energy … true?
.. here is me on world tour … on my unicycle at Eiffel Tower .. cycling must be good for ???
http://tinyurl.com/4xt4le
First, thanks for taking on this topic. It is one that is near and dear to my heart, lungs, and legs.
Up until mid way through last year I commuted 33k each way back and forth from work. I have a car and live in Japan so public transport is also readily available. If you are going to do this kind of distance you need a decent bicycle but that doesn’t mean going ape with the latest and greatest in carbon fiber. I have a good bike with components and wheels that are on the bottom end of higher quality stuff. (Scott Aluminum Frame, Carbon Fork, Shimano 105 Components for the cyclists out there) I paid roughly 2,000 USD for it originally and in the first year I put about 300 USD into it in maintenance but it seemed to find a groove after a while where everything just worked and worked well for 5000 plus km before any noteworthy maintenance was necessary.
Economically I approached the project (and my wife) with the argument that the train was roughly 9USD per day which I rounded conveniently up to 10USD so I could look at 250 days and a free bicycle. That passed the wife test and I am pretty confident it worked out to my advantage financially.
We also have a car and the tolls, gas and parking per day are pretty good when you want to justify a fairly pricey bike. Parking is 10US per day, tolls 8USD per day, and gas somewhere around 8USD per day again Japan so all the whining in North America is laughable. We have been paying these prices for years. Call the auto commute 25 dollars per day and even a decent road bike is looking like a couple of months of commuting and it was free.
I agree that a good bicycle is a “normal good” most of the time because not many people are going to really commit to a bicycle commute. That said, assuming the gas prices stay where they are, I expect we may see more people making the commitment and actually using the bicycle to their financial advantage.
One thing not to be overlooked is that energy costs no matter whether it comes from engines or your legs. I use a heart rate monitor most of the time. One piece of useful information these provide is how many calories you burn during a ride. Cycling is one of the most efficient methods for converting human energy to personal speed and you can burn up some serious fuel on a fast and furious ride that your body becomes completely conditioned to executing 2x daily.
I would average 29 kph, and arrive to work in just under an hour. In the process I would burn 1,000 Calories on the way in and 1,000 Calories on the way home. Now being in education, I had access to showers and a buffet lunch meal plan which I exploited to the maximum. Had I not I would have eaten so much at home that my wife might have started to add that to the total expense of this lifestyle throwing off my solid financial reasoning.
I really enjoyed the idea presented in this blog about cycles as an normal good in comparison to an inferior good. I would offer it depends on how the person uses it. In my case, I am certain the bike saved us money so in that case inferior it is.
Further complicating things though, my resting heart rate is still down below 50 and my body mass index has increased only 3% in the 20 years since I was sixteen so I think that will keep me out of the hospital more than others as we age and die. Maybe I won’t be a financial burden on society in my old age but…I was hit twice and whether due to experience (cycling for years) or luck (lucky for years) I wasn’t hurt badly enough for even so much as a band aid. Without a trace of ego as I say this, I think the statistics would change if everybody was out there spinning pedals.
I choose to ride with buses, taxis, scooter, motorcycles and cars over the sidewalk because of their relative predictabilty compared to the average person walking down the street not to mention riding a two wheeled object that has “been idle for years.” The very thought of everyone on bikes makes me want to take up driving.
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