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Summary transport economics & management
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summary of the course transport economics and management in the MSc Transport and supply chain management
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Transport Economics and Management Full Summary
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Summary Transport Economics and ManagementBy Pepijn Paans
Student 2016 – 2017
MSc Transport & Supply Chain Management
FACEBOOK: https://www.facebook.com/pepijn.paans
LINKEDIN: https://www.linkedin.com/in/pepijn-paans-6b828a80
EMAIL: Pepijn_paans@live.nl
,MG CHAPTER 3
Effective demand = number of products that customers are willing and able to buy at a given
price
Derived demand = products are wanted because they allow customers to satisfy other
demand (petrol needs to be bought in order to drive a car from A to B).
Determinants of demand
• Price:
The law of demand: when the price of a given product increases the demanded quantity will
decrease = the inverse demand curve.
This law exists because:
1. Income effect: When the price of a product increases, the purchasing power of
consumers reduces given a constant income (can be a positive or a negative relation)
2. Substitution effect: when the price of a product increases, consumers will buy more
of substitute products instead given a constant final satisfaction level.
Both effects also work in the opposite direction.
An exception to the law of demand in relation to transport is that of conspicuous
consumption. The goods related to this consumption are wanted because they are expensive
and therefore confer a certain degree of social status.
When their price drops, wealthy people might actually stop buying these goods.
Ø availability and quality of substitute products
Ø Availability and quality of complementary products
• Income changes
• Population changes; a bigger population demands more transport
• Popularity effects; for example, after a train accident or terrorist attack
• Speed; depending on your needs
• Reliability
• Bureaucracy
• Security
The demand curve shows the effect that the price of a product has on the quantity that is
demanded of that product.
A demand curve might be influenced by the demand determinants above, and can then shift
to the right or left, where the demand changes given a constant price level.
Demand over time is not stable but usually has peaks, either on a weekly, monthly or yearly
level.
,Elasticity of demand
How responsive is the magnitude of one factor to a change in a magnitude of another factor
(both in percentage terms).
Elasticity = % change in factor A / % change in factor B
This expresses the average percentage change in the magnitude of factor A for each
percentage point change in the magnitude of factor B.
Shows the importance of a factor in determining the demand of a product.
The larger the coefficient, the more influential is the determining factor.
Price elasticity of demand = % change in quantity demanded / % change in price
This relationship is most of the times inverse, resulting in a negative outcome.
Ordinary price elasticities of demand measure the combined income and substitution effects
of changes of price on the demand for passenger transport.
Or, the combined scale and substitution effects of changes in input price on the
demand for freight transport.
Compensated elasticities of demand measure only the pure substitution effects of a change
in price.
When the coefficient that results from the calculation is between 0 and -1 the product is said
to be price inelastic and the quantity demanded is not very responsive to a change in price.
When the coefficient is less than -1 the product is price elastic and the quantity demanded is
responsive to a change in its price.
When the coefficient is exactly -1, the product is said to be unitary price elastic: a change in
its price results in an equal but opposite result in the demand.
THE PRICE ELASTICITY OF DEMAND FOR A PRODUCT IS NOT THE SAME AS THE GRADIENT OF
ITS DEMAND CURVE! à it is calculated in percentages and not in absolute figures.
Price elasticities vary along the demand curve of a product, and therefore cannot be used on
big price changes.
5 determinants of price elasticity of demand:
1. Proportion of consumer expenditure, the smaller the proportion of total expenditure
that a product accounts for, the more price inelastic it is likely to be.
2. Addictiveness, the more addictive a product is, the more price inelastic it will be.
, 3. Level of necessity, the greater the necessity of a product, the more price inelastic it
will be.
4. The time scale, the longer the time period involved, the more price elastic the
product is likely to be. Products become more price elastic over time when they are
relatively expensive and consumers over time learn about alternatives.
5. The closeness of substitutes, the greater this number, the more price elastic a
product will be, because it is easily replaced with something very similar.
Cross elasticity of demand:
Shows the responsiveness of the quantity demanded of one product to a change in the price
of another.
Xed = % change in the quantity demanded of product A / % change in price of product B
When this number is +, products are each other’s substitutes
When this number is -, products are each other’s complements
The market clearing price is the price where supply and demand meet.
MG CHAPTER 4
4 necessary things for production to happen, factors of production are:
1. Land, referring to all raw materials
2. Labour, e.g. workers
3. Capital, all man-made resources required for production
4. Entrepreneurship, the risk taking involved in production.
The short run of production is defined as the time during which at least 1 of the factors
remains constant. The long run therefore automatically refers to the time frame during
which all the factors can be variable.
Fixed costs are costs that remain the same regardless of the output that is produced.
Variable costs are costs that change as the level of output changes.
Semi variable costs are costs that remain fixed until a certain output is reached, and change
while this point is reached.
Three types of costs:
Total Costs (TC) = FC + VC + SVC
Average Costs (AC) = TC / Q
Average fixed costs fall as the output increases, but do so in a continually slowing rate.
, The short run average variable costs are likely to rise as the output increases, due to falling
efficiency because at least one of the production factors is constant on the short run.
Because the effect of the lowering average fixed costs weakens over time as output
increases, and because the average variable costs will increase over time as output
increases, the short run average cost (SRAC) curve looks like a U-shape.
The bottom of this U is where the producer is productively efficient (producing at minimum
average costs). This part can be a flat line and the lowest output of this line is known as the
minimum efficient scale (MES).
The combined optimums of all the average costs curves that a producer can be in with his
company, determines the long run average cost curve. This is known as the envelop
theorem.
The long run average cost curve (LRAC) has a U-shape for another reason than the SRAC
curves.
It is U-shaped, because of economies and diseconomies of scale.
These are defined as reducing and increasing long run average costs as a result of increasing
output.
All the factors of production need to be variable for them to occur and therefore these
phenomena are long run.
Causes for economies of scale
- Technical economies of scale: producers will be able to use larger more efficient
capital as output increases (1 tanker of 2000 gallons costs relatively less than 2
tankers of 1000 gallons).
- Managerial economies of scale: Growing producers or established firms are able to
employ the best management which may be more efficient, resulting in decreasing
average costs.
- Marketing economies of scale: buying in bulk decreases average prices and also
marketing costs or administration costs will be spread out over a larger output, so
that advertising costs per unit will drop.
- Financial economies of scale: Banks are more willing to lend money to large
companies and moreover will charge them with a lower interest rate.
However, the strength of these effects will gradually diminish and go over in diseconomies
of scale. This can be caused by:
- Red-tape: when producers grow, the use of time will become less efficient due to for
example increased paper work and administration. This causes average costs to rise.
- Communication troubles: communication becomes less efficient in growing firms and
might result in dissatisfaction of workers and therefore an increase in average costs.
Economies of scope happens when the average costs decline while the network size increase
(this can be a short run phenomenon).
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