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Lecture 1 Transport Economics PDF
Lecture 1 Transport Economics PDF
Topics to be covered:
-Transport Economics
- Road Pricing
- Travel Demand Forecasting
- Project Appraisal
Transport Demand
The demand for transport is said to be a derived demand. People do not travel for
the joy of travelling, rather they travel as they need/want to engage in some activity.
Transport demand can be focused upon the following:
• The need for persons to travel to other locations to partake in an activity
• The need to move goods/freight from the point of manufacture to the point of
consumption
The demand for transport depends largely upon consumers income and the price of
a particular good.
Individuals can also drive to their location, for this example we assume those on
higher incomes drive and those on lower incomes use public transport.
Da = f ( Pa , P1 , P2 ,........, Pw , Y )
The prices can be 1) the fare or out-of-pocket costs, 2) other costs (level of
service): time costs, comfort, convenience, etc. They can be measured and
expressed in monetary terms. These terms are called generalised costs.
q =a−β p
Where q is the quantity of trips demanded and a, β are constant demand
parameters. P is the total generalised price of the trip.
These three measures of elasticity yield approximately equal values for relatively
small price changes. For larger differences the shrinkage ratio begins to deviate
significantly.
Example:
An aggregated demand function is represented by the equation
q = 200 – 10p
Where q is the number of trips made and p is the price per-trip. Find the price
elasticity when
q = 0, q = 50, q = 100, q = 200 trips
Corresponds to
p = 20, p = 15, p = 10, p = 5, p = 0 cents
Solution:
When the elasticity is less than -1 (i.e. more negative than -1) the demand is
described as being elastic, meaning that the resulting percentage change in
quantity of trip making will be larger than the percentage change in price. Or
demand is relatively sensitive to price change.
Cross elasticity:
• the effect of the demand to the price of another good
• positive when goods are substitutes
• e.g. when the price of oil increases, individuals tend to use more public transport
• negative when goods are complements (used together)
• e.g. the price of downtown parking goes up, the demand for driving a car
downtown goes down.
Demand – Supply Equilibrium
1. Economic Theory
In demand and a supply we have two intersecting groups: producers – supply
function and consumers the demand function.
The supply function: expresses the amount of goods that the suppliers produce
as a function of the price of the product. As the price increases, it becomes
more profitable to produce more products, and the quantity supplied will
increase.
Demand Function: describes the aggregate behaviour of consumers. The
amount of the product consumed is given as a function of its price. As the price
increases, the amount consumed will decrease.
E: is the equilibrium point. The price at this point is the equilibrium market price.
At this equilibrium market price, the entire quantity produced is equal to the
quantity consumed.
2. Extension to include level of service
- The transportation market can be analysed in the framework of supply/demand
equilibrium.
- Like demand for a transportation good and service, the supply is characterised
by the level of service offered in addition to the price charged
- The level of service is defined by several characteristics of the service such as;
travel time, headway, reliability etc. This is termed the generalised cost.
- The level of service is dependant upon the usage of the transportation system.
For example the Luas, the greater the demand the longer it takes to fill the tram,
and an increased likelihood that commuters boarding closer to the city centre
will not be able to board.
The area BCOQ is the total value the community paid and ABC is the
consumers benefit, or net community benefit.
( P1 − P2 )(Q1 + Q2 )
2
Example: A bus company with an existing fleet of 200 50-seater buses increases its
fleet size by 10% and reduces its fare by €1.20 to €1.05.
Calculate the consumer surplus, and the price elasticity of demand.
You can assume that the existing buses had a load factor of 80% and it is expected
that the increase in LOS will result in a load factor of 90%.
Assume that all buses in the fleet are being used during the peak hours.
Vehicle load factor is a measure of seat availability, and a load factor of 1.0 means
that every seat is occupied.
Solution:
Existing situation:
200 (buses) * 50 (seats) * 0.8 (load factor) = 8,000 persons per hour
Revenue: 8,000 * €1.20 = €9,600
New situation:
220 (buses) * 50 (seats) * 0.9 (load factor) = 9,900 persons per hour
Revenue: 9,900 * €1.05 = €10,395
Q1 − Q0 ( P1 + P2 ) / 2
P1 − P0 (Q1 + Q0 ) / 2
−1900 1.125
= −1.59
−0.15 8950
Costs:
- The total cost of owning a company is broken down between fixed and variable
costs.
- A fixed cost is unrelated to production or utilisation of equipment, it’s a cost
which is incurred no matter what. For example in transport trucks in a freight
company, planes for an airline etc.
- A variable cost, is a cost which changes with the level of production. For
example staffing or fuel costs. As the demand for e.g. freight increases so too
does the cost of labour and fuel.
- Total costs = fixed costs + variable costs
- Marginal costs, is the production cost associated with the production of one
extra unit of output.
Total cost = TC ( x) = FC + VC ( x)
Average cost = TC ( x) FC VC ( x)
AC ( x) = = +
x x x
Marginal cost =
MC ( x) = TC ( x) − TC ( x − 1)
Example
Example
Example
When the marginal cost is below the average total costs or the average variable
costs ,then the AC would be declining. When marginal cost is above the
average cost then the average cost would be increasing. Therefore the marginal
cost should intersect with the average cost at the lowest point in order to pull the
average cost upwards.