Summary Transport Economics Essay
The majority of the demand for passengers transport is derived. The law of demand states that as the price increasing the demand is decreasing A demand curve is displayed as follows: There are two parts to the explanation as to why the law of demand exists: I) “income effect ” when the prices increase obviously the purchasing power f the consumers will decrease. (assumed their income does not change) 2) Substitution effect” When the price Of a certain good increases the consumer is likely to look for substitutes which fulfill the same needs, (looking for cheaper alternatives).
The above is easily to implacable to the transport sector. There are also two exceptions to the law of demand: “Given goods’ and goods of “conspicuous consumption” Only the later are applicable to the sector of transport. These product require a certain attitude from the consumer. People buy certain products for a higher price than they should due to the status they obtain” from it, This is hard to explain from and economical behavior point of view.
3. 2 determinants of demand The most important determinant of quantity demanded of a product is the price to pay.
Obviously there are several other determinants influencing demand, they are listed below: The price, availability, and quality of substitutes The price, availability and quality tot complementary products (a complement is a product which is needed for consuming the actual product, petrol) Income changes Population changes Popularity effects, Poor example it is not “cool” to travel with public transportation Speed Both important for transporting goods and passengers. (think about inventory and interest costs).
Reliability Bureaucracy think in terms of paperwork and administration for different modes of transport. Security risk Of product getting damaged etc. Due to the deterrents above the demand can shift in two ways. For example decrease in the price of tomato ketchup can decrease the demand for mayonnaise (shifting inwards). The figure below shows the exact opposite With an shift inboards, increasing the demand. For this figure there is one assumption made: Price is the only changing factor Sisters Paramus assumption” 3. Peak problem in road transport Basically this paragraph only takes great Britain into account, and therefore probably irrelevant. Though there is an interesting part summing up factors that may affect average speed on road transport: Type of roads in the used network (number of traffic junctions) Road factors (number of accidents on the route, weather conditions) The behavior of the measuring drivers can infect the results The paragraph 3. 3. 4 mentioned the implications It is tough to predict demand in traffic due to peaks and Off-peaks.
Leading to congestion of all sorts. But also to under usage of certain roads during day time. Take for example the AAA (highway) is tremendously busy during rush hour, but almost empty during daytime therefore the load factor being uneconomic. For transport: Transport providers usually choose compromising solution, the do put on more services during peak periods. This means that surplus capital is lying idle during intervening periods, causing inventory costs. 3. Elasticity of demand In the previous paragraph there were several determinants for changing demand mentioned. However economist have to deal with another important actor that has an influence. This is where “elasticity” comes into play. “elasticity” is simply a means of representing how responsive the magnitude of one factor is to change in the magnitude of another (in percentages). The formula for elasticity is: percentage change in factor A Percentage change in factor B This is applicable for all the different pairs of variables.
For example the responsiveness of the number of holidays taken in France to a change in the volume of rainfall in Britain . The benefit of calculating elasticity: It is by calculating elasticity of demand that one can properly ascertain just owe important a factor is in determining the quantity demanded of a particular product. Fifth elasticity is close to “o” then one can conclude that it is relatively unimportant. So the larger the coefficient is the more influence it has.
The effects that are measured in transport are often “quality and convenience’ In economics the price elasticity of demand (PEED) is very important: ( Showing the responsiveness of the quantity demanded of a product in percentage terms, to a percentage change in the price of that product. PEED: Percentage change in quantity demanded Percentage change in price There are two different forms of price elasticity of demand I ordinary: combining income and substitution effects of changes in price 2 compensated: only measures the pure substitution effects on change in price Why is price elasticity important?
Policy makes: Important for estimating demand (as a result of changing petrol prices) Transport economics: important for estimating future demand and trends Transport producers:to maximize their profits (extra explanation peg 52 & There are five main factors determining how price elastic a product is: 1. Proportion of consumer expenditure someone spending 100 Euro for jeans, goes not care about a Euro increase in price for his sweater. 2. Addictiveness : The more addictiveness, the more price inelastic e. Cigarettes 3. Level of necessity: the more needed, the more price inelastic. 4. The time scale: obvious as well The scale in which the product is replaceable is also an important factor. (substitutes) Elasticity can also be measured compared to income: WED: % change in quantity demanded % change in income Fifth outcome of this formula is positive it means that an increase in the incomes of consumers is associated with an increase in the quantity demanded.
Then there is the Cross elasticity of demand, this shows the responsiveness of the quantity demand on one product to a change in price of another: Axed: % change in the quantity demanded of product A % change in the price of product B The Axed is pretty common in freight transport, for example a price increase in road transport results in a large increase Of the usage Of rail transport. 3. 5 Market price A market is a place where consumers and suppliers come together to trade. This results into the simple model for demand and supply.
At any price higher then Pl there would be excess supply and so producers loud reduce their prices in order to sell the excess of stock. At any price lower then Pl there would be an excess of demand and the demand would force the price to be higher. This is a result of the competition between the consumers. At a certain moment the equilibrium is automatically reached, This equilibrium is also called the “market clearing price”. 3. 6 market welfare The notion of welfare or value is founded on the notions of consumer and producer sovereignty.
For consumers in market equilibrium, the price represents the price they are willing to pay for one extra unit. It is their own judgment about he value of the item relative to all other things they might have chosen to spend that same budget on. Figure 4 shows that consumer are willing to pay UP for the first unit, but the actually only have to pay market price of Pl The difference between the two prices is called the surplus at that unit and the Whole area between the demand curve and the market price is called the consumer surplus of the market as 3 Whole.
Consumers Will only pay an amount that is at most equal to the satisfaction that it affords them consumer surplus is a representation of their welfare, it shows the extra satisfaction the product brings to them. This is also applicable for the producers The total market welfare can be seen as being represented by consumer surplus * producer surplus 3. 79/11 and the effects on the market This paragraph describes what incidents can do with market demand.
For example the airline market as a result of the terrorist attacks shifting demand dramatically inwards, but the supply curve shifted onwards. 3. 8th problem of rural demand This paragraph is about the uneconomic of rural areas. This paragraph is probably not important for the exam. Chapter 4 Definitions There are four factors that are necessary for any production to occur: Land Labor Capital Entrepreneurship TWO Other important definitions are “long term” & “short term” Short run is defined as a period of time in which at least one of the factors of production is fixed.
The long run is defined as the period were all the production factors are variable. 4. 2 Classification of costs according to their nature A cost is something that a producer has to pay in order to remain in operation. There can be 3 sorts of cost subdivided 1: Fixed Costs 2: Variable costs: Expending vehicle fleet is increasing fuel costs (variable) 3: Semi variable costs Cost which are fixed over a certain range, but become arable as output increases. (labor costs & spare parts such as tires) 4. Classification of costs according to their scale Three types of costs: 1 Total cost (ETC) ETC- F-c. Voss 2 Average costs (AC), the cost for each unit of output produced. Calculated as follows: AC- ETC,’Q 3 Marginal costs (MAC) The additional cost incurred by producing one additional unit. Long run average cost (LIRA) is U-shaped, With the short run curves lying inside of it. This particular shape because of the economies and discomposes of scale. Defined as reducing and increasing long run average costs as a result Of increasing output.
Why are they long run effects? Because all 4 production factors need to be variable! The long run average cost curve looks like this: Figure 5: The Ion run average cost curve What are causes of economies of scale? Technical economies of scale (Airbus away) Managerial economies of scale (When getting better, easy to hunt best managers) Marketing economies of scale (More bargaining power, purchasing raw materials in bulk) but also because tot the rising sales after advertising, the advertising cost per unit decrease.
Financial economies of scale (banks are more likely to loan to a rowing institution) All the above cause long run average cost (LIRA) to fall as output increases. But gradually their strength will diminish and discomposes of scale will dominate. The following 2 reasons for discomposes below: Red tape: increasing number of paperwork and administrative tasks. Everything is pay more difficult to coordinate, causing efficiency to fall. Forcing AC to go up Communication troubles: The larger the producer becomes, the tougher communication gets, instruction not get followed up etc.
Economies of scope Where economies Of scale is the phenomenon Of declining long run average cost s output increases. Economies of scope is that of declining average cost as network size increases. This happens over long run and short run (so not all production factors have to be fixed) Another phenomenon is economies of density. This is where average cost are reduced as existing capital is used more intensively. 4. 4 Other types of cost important in TEM There are five different types of cost in tern.
Listed below Opportunity costs Simply defined as the second best alternative as a result of making an economic decision Time Costs Time is an important factor, and this type of cost is simply defined as ” time involved” Specific costs Examples are specific to transport: (UN)loading costs joint costs When a truck moves out it has to come back one way or another, so one sort of joint cost is the return trip Common costs Different sorts of consumers using same product: public road egg used by busses trucks and automobiles.
Classification of revenue Revenue is simply the money that flows into a business from consumers purchasing its products and services. Total revenue (T R) , all money coming in as a result of consumers purchasing products. Defined as Average revenue (AR) is revenue for every unit produced and is calculated as follows. AR = TRIM If a producer sells all of its products at a constant price, the average revenue will simply be equal to the price.
Figure 6: the relationship between AR MR. TRY 4. Profit minimization and alternative objectives To maximize total profit producers should produce all the units of output up to and including the unit at which marginal revenue is equal to marginal cost, but no more. The assumption of profit minimization is particular strong in the case of entrepreneurial capitalism, which was the prevailing business environment during the time of classical economists. Revenue minimization
Founded by Bamboo, it is argued that managers Will aim to maximize the sales revenue toothier businesses, there are numerous potential motivating reasons for this: Consumers may view business with falling revenue as being crap Financial institutions don’t loan anymore Related suppliers are reluctant to cooperate Resulting in decrease of personnel Diminishing salaries Williamson tried to widen Bamboo’s scope, and looked for other factors that managers would seek for other than sales revenue.
He came to the conclusion that they look for “Managerial utility minimization” such as ” salary, security, rower, status and prestige Robin marries, stated that managers are more likely to focus on long term growth. This obviously has to do with power and prestige. 5 Competition and Conceivability 5. 1 introduction There are 4 different types Of markets where producers can compete in. Displayed in the figure below.
For the market of perfect competition there are some assumptions that need to be made: uncountable small producers and consumers, having no influence on price Products are homogeneous NO entry barriers Perfect information Free movement of products The market of perfect completion shows the following curve for the market and he firm: The right part of the two different demand curves (the curve for the firm) shows an perfectly horizontal Demand line (orange) this is because demand is perfectly price elastic.
As a result of the products in the market being homogeneous. (no consumer cares where he or she buys the product). They will always pick the cheapest supplier, As every extra unit produced, this will simply just add Pl to the total revenue. Marginal revenue will be constantly equal to the price as well. To calculate the total market supply, One needs to simply add up the amount supplied by each individual producers. Horizontal summing). 5. The adjustment mechanism When looking at the previous demand curve, one will notice that this is an equilibrium where no excess in revenue (abnormal profit) will Occur _ However there are situations where this does occur, though such a disequilibrium is of short term. The market price PI is higher than the average cost Of the individual producers, resulting in an abnormal profit. This abnormal profit will disappear in no time since it Will be highly attractive for competitors to enter the marker (and the market S curve will shift outwards) Obviously this exact opposite can occur hen market price is low. . Contestable markets A contestable market is a market where there are no barriers to entry and especially no sunk costs. So there is always a treat of new competitors. And there are no sunk costs (emailing Steen die individualize jinn mom De market tee bettered, mar die .NET mere tee provoker jinn big heat overeaten van De market. Bachelorhood marketing and licensing). Because of the absence of sunk costs, it attracts hit and runners, who capture the abnormal profit and run off.
The difference between a competitive market and a contestable market is: It does not tater how many producers there are in a contestable market. It is the actual treat of newcomers which drives the price downwards. Three other factors which are necessary for a market to be contestable: Technology is easily accessible for n comers No large finance reserves for existing producers 310″ brand loyalty Example Airlines! 6 Monopoly 6. 1 introduction A market where there is a significant barrier to entry. And market is in hands of one or only a few competitors.
And Obviously high sunk costs. But also often a high brand loyalty, making it even more difficult to enter the market. Next to he difficulties one will find entering the market, there are also different forms of driving competition away from the market. Cross-substitution Losing abnormal profits from some markets to fund losses in others, resulting in very low prices which make it unprofitable for others to enter. Vertical restraints Gaining control over other suppliers. Creating exclusive dealing contracts.
Negative branding Establishing a negative view of competitors amongst consumers Collusion Cartel forming (which is illegal obviously) 6. Modeling the monopoly In this example there is only no competition at all, (price maker) This figure is different then Others because it displays both the market and the firm, (note the market = the firm). The producer maximizes profit by producing Km units at a price Of Pr- As the marginal cost curve is equal to the Supply curve (MAC=S) and as the average revenue (AR) is equal to D. He resulting equilibrium in perfect competition would be at PC so it is the case that the price at a monopoly is higher and the quantity lower then under perfect competition. Note that quality is also lower then under perfect competition, is unfavorable. Welfare This part is pretty difficult. De graph below shows the efficiency of a monopoly market. Figure 9 Welfare loss I The firm is not operating on the lowest part of the AC-Nine, so the market is not fully efficient. 2 The price is higher than the marginal cost, lacking efficiency as well.
Why is the monopoly doing this? To increase its producer surplus or its welfare this is shown in area X (red) Area Y is reducing the surplus of the producer, but the Y part is way smaller then X. So this pricing strategy is pretty good. However this also has a negative influence. The consumers see their reduce in welfare (X & Z) Meaning that area X is completely transferred from the consumer o the producer.. And Y & Z have been lost, none as the Deadweight welfare loss A conclusion could be: a profit maximizing monopoly leads to inefficient market outcomes. 6. Price discrimination The purpose of price discrimination is to gain as much surplus for the producer from the consumer. By charging prices almost equal to what the different types of consumers would like to give for it. Three types: First degree price discrimination Second degree price discrimination Third degree price discrimination First degree The producer splits up the market into different segments, based on the demand heartsickness of the consumers, and set an optimal price, Figure 10 Figure 10 shows the optimal price 3 different groups are willing to pay.
The firm has maximized its own surplus (green), minimizing the surplus of the consumer groups. (orange) Second degree Often used as a strategy of charging later consumers a lower price, (Elicitation van sledding) Note that the marginal cost remain constant until a certain point that the new inventory arrives. Then skyrocketing back up_, so for clothing this happens four times a year. This is the reason why there are last minute tickets deals for airlines Note that this occurs periodically Third degree These segments all have different demand in terms of price elasticity.