Final Exam Transpo

San Beda University
College of Arts and Sciences

Department of Economics
TRANSPORTATION
ECONOMICS
Jones Mendoza
50 Years of Excellence in Economics
Introduction to
Transport Economics
Introduction to Transport Economics
Outline of Presentation
Transportation and Economics
Conceptual Overview of Transportation Economics
Economic Characteristics of Transport
Importance of Transportation Economics in Economic

Development and Public Policy
Development of Transportation
Transportation System and Travel Demand
Transportation and
Economics
REVIEW: What is Economics??
“the study of how people and society end up

choosing, with or without the use of money, to
employ scarce productive resources that could
have alternative uses to produce various
commodities and distribute them for
consumption, now and in the future, among
various persons and groups in society. It
analyzes the costs and benefits of improving
patterns of resource allocation”
- (Samuelson, 1976)
!5
What is Transportation??
o Transportation refers to the movement of

persons, goods and services from one point to
another, with the aid of fixed facilities and/or
vehicles such as bridges, highway pavements,
pipelines, aircraft, etc.
o Transportation is the movement of people and goods
over time and space...
o Transportation should be…
➢ Safe
➢ Environmentally Friendly
!6
Transportation and Economics
Transportation, from the economist’s viewpoint:

o May therefore be considered in terms of either
supply (the available quantity and quality of the
fixed facilities and vehicles) or demand (the
“desire” of persons or goods to be transported and
ability to pay for it).
o Transportation economics can be described as the
study of how scarce productive resources are used
to produce and distribute various transportation
services for consumption by the society.
Scope of Transportation Economics
❖ Transportation economics, while considered a

branch of applied micro-economics, is associated
with certain unique issues (Khisty and Lall, 2002)
such as:
➢ The demand for transportation is not direct, but is derived
➢ The consumption of each transportation facility (i.E., Each
trip) is unique in time and space
➢ Technological differences among different modes and
economies of scale
➢ Governmental interventionist policies and regulations in
transportation
!8
Scope of Transportation Economics
❖ Transportation economics specifically addresses:

➢ Demand of transportation services
➢ Supply of transportation facilities
➢ Elasticities of demand and supply
➢ Price mechanisms
➢ Transportation cost analysis
!9
Transport issues that economics can shed
light on
o Congestion and the role of road pricing,
o The impact of traffic on the environment,
o The organization of public transport services,
o The rise of low-cost airlines,
o The capacity of the rail network, or indeed
‘problems on the railways’ and so on,
Conceptual Overview of
Transportation Economics
o Most individuals have a basic need to travel

from one location to another.
o Modern life- structured around accessing
goods and services that lie outside of the
immediate vicinity of the home.
o Transport services required
– to gain access to employment, education,
leisure activities, personal care/health services
as well as access to retail outlets for household
goods such as food, clothing, electrical goods,
books, CDs and so on.
o The development of the world wide web: Transportation

is the movement of people and goods over time and
space...
➢ Has not, as yet, succeeded in turning the majority of
individuals into computer geeks that need to get out
more!
➢ Transport therefore still has a key role to play in
modern society.
o This importance is further reflected in the link between
transport levels and economic growth.
o In the past this link has been very strong, as both
passenger and freight transport play a vital role in the
function of the economy, with strong growth normally
associated with innovative transport solutions.
Why transport has experienced major
changes in recent years
o Governments worldwide have become
increasingly aware of the need to introduce
effective ways of containing the use of the
private car, both as a means of tackling
congestion and as a result of the negative
environmental impacts its use entails.
o Transport in general and the movement of
passengers and freight bring with its
considerable negative impacts in terms of air
pollution, noise and visual intrusion.
o There has also been regulatory change and a
reduction in state ownership of transport
companies in all areas of transport, from the
rail and bus industries, to freight companies,
and in the aviation sector.
What is Transport Economics?
o Economics is one of the social sciences, concerns

the study of people and their actions.
o It is therefore about the production, distribution and
use of society’s goods and services
o Transport economics is a branch of economics that
deals with the allocation of resources within the
transport sector. ( American economist John R.
Meyer)
o Transport economics could also be defined as the
study of the movement of people and goods over
space and time.
oDepartment
It is ofaEconomics
branch of economics that deals with the
Scarcity, Choice And Opportunity Cost
o Scarcity is defined as economic problem and apply
both to the Third world economies or advanced
economies.
➢ In simple terms individuals cannot have everything
that they want because there is a finite limit on
the resources that can be used to satisfy these
‘wants’.
➢ Any resource is therefore scarce,
➢ If individuals cannot have all that they want, then
choices need to be made,
- put simply every choice involves a cost.
o This will always be the next best alternative that
could have had been selected when that choice was
made.
Department This is known as the opportunity cost of that
of Economics
o Thus if a particular society does not have sufficient

resources to build both a new stretch of motorway
and a new airport, it must make a choice between
the two.
o If it chooses to build the motorway then the
opportunity cost of the motorway is the airport that
was not built.
o Opportunity cost therefore can be formally defined
as the next best alternative forgone and is
consequently not assessed using financial criteria.
o These three concepts of scarcity, choice and

opportunity cost can all be illustrated on what is
known as a Production Possibility Frontier
1. The most important characteristic of transport is

that it is not really demanded in its own right.
o People wish, in general, to travel so that some
benefit can be obtained at the final destination.
The trip itself is to be short as possible.
o The demand for transport is therefore a derived
demand.
2. Another characteristic is that transport demand

takes place over space and time.
o This distinguishes transport economics from
other branches of economics.
o Transport journeys are made over a particular
distance between start and end points and
take a particular amount of time.
o The reality though is that this demand is not
spread evenly throughout the network. This
uneven demand can cause traffic congestion.
3. Transport is often divided into fixed and mobile

component, the fixed component consist of
infrastructure and the mobile component of
vehicles and operations.
o Transport by itself is not sufficient condition
for development; however, the lack of
transport infrastructure can be seen as a
constraining factor on development.
o The development of transport increases
traveling and trade, especially in agricultural
product. This contributed to the development
of cities and ports.
IMPORTANCE OF
TRANSPORTATION
ECONOMICS
Importance of Transport in Economic
Development
o Role in Production: It enables the
entrepreneur to assemble more easily the
raw material and labour input needed to
make a specific product.
➢ The same transportation system moves intermediate
goods to other producers for subsequent use in their
production process, and it moves finished goods to
the consumers. An efficient transport system enables
Just in Time (JIT) production techniques. Components
are delivered when needed reducing a firms stock
levels hence unit costs
Development
o Employment Opportunities: Transport
also contributes to economic
development through job creation.
➢ This can either be direct or indirect. Direct
employment will be created in the industry itself ,
such as drivers , logistics managers and pilots.
Indirectly, jobs are created in for example the
insurance and financing industry, related to the
assets of transport companies.
Development
o Geographical Specialization: The
development of transportation system
has enabled regions to specialise in
producing its most efficient output.
Production and consumption of
products can take place in two
different locations.
➢ The bulk of the electronic products we use daily,
such as television sets, is manufactured in the
east and transported through ship to Africa.
➢ Substantial economies of scale have been
achieved and these have resulted in reduced per
unit production costs.
Development
o Trade: Transportation has enabled countries to trade
with other countries throughout the world.
International transportation has led the way to more
world trade, and it has enabled nations or regions to
specialise in producing whatever it can do best
(comparative advantage)
o Tourism: The airline industry has specifically
contributed to the growth in the tourism industry, due
to airline being fast, safe and relatively cheap. The car
rental industry, likewise has also played a major role in
tourism development. Currently tourism industry is one
of the fastest growing industry in the Philippines.
Development
o Others:
➢ Time Utility; Efficient transportation creates time
utility by ensuring that products are at the proper
locations when needed
➢ Place Utility ; The reduction in transportation cost
between points A and B gives a commodity a place
utility. This place utility will encourage market areas
to purchase products from distant suppliers that
might be locally produced
➢ Quantity Utility; Transportation gives goods a quantity
utility through the assurance that the goods will arrive
without damage. This helps assure that the quantity
demanded is the same as quantity delivered
Transportation and
Public Policy
Transportation and Public Policy
Investments
❖ Transportation facilities such highways and

bridges are associated with annual investment
levels
❖ Such investments are in the form of new
construction, rehabilitation and maintenance,
and operations.
!29
Government Management
❖ Transportation agencies at all levels of

government have the responsibility of effectively
managing the performance and usage of their
physical assets
❖ Such assets can be kept in acceptable condition
to provide desirable levels of service with
available resources.
!30
Government Management of Public Assets

physical assets
❖ Managers of transportation facilities are now
being perceived as stewards of a vast public
asset, and are expected to provide operational
and financial accountability of any investment
decision
!31

physical assets
❖ Managers of transportation facilities are now
being perceived as stewards of a vast public
asset, and are expected to provide operational
and financial accountability of any investment
decision
!32
❖ The management of transportation assets

➢ Systematic process of maintaining, upgrading, and
operating physical assets cost-effectively (FHWA, 1999)
that combines engineering principles with sound
business practices and economic theory
➢ A means of achieving more organized, logical and
integrated approaches to decision making involving
transportation systems.
!33
Focal Issues of Transportation in Public Policy
??
E ?
F
S A
Source: http://inventorspot.com/what_is_the_future_of_transportation
!34
??
E?
F
S A
Source: http://inventorspot.com/what_is_the_future_of_transportation
!35
Emissions from Vehicles
L L
TA
E N ??
N M ??
R O
I ND LY
V
EN RIE
Y F
Emissions
Development of
Transportation
Transportation Modes
Motorized Non-Motorized
• Automobile •Biking
•Transit •Walking
-Bus
-Rail
- Rapid Transit
(subway)
!38
History of Transportation
❖ Up to the 18th century, the most important commercial cities in
the world were maritime cities due to the relatively low costs of
water transportation.
❖ The invention of the steam engine in the eighteenth century
marked a watershed in the history of transportation by allowing
for greater economy in transportation of goods and passengers
❖ After World War II, advancements in road construction
technology and mass production of the automobile led to
increasing use of highways for land transportation.
❖ In recent years, certain developments have greatly influenced
the economics of the various modes of transportation. These
include the deregulation of the transportation industry
Ridership
Automobile
Bus
Electric
Tramway
Cable car
Horse-drawn
Omni bus
Time
1860 1893 1923 1948

!40
!41
Hybrid
Cars
Environmentally
Friendly
!42
Hybrid Cars
Gasoline power + Electric power
!43
!44
!45
Year: 1804 Year: 2008

Speed: 8 km/h Speed: ~ 500 km/h
!46
Railway In Japan nearly 40 years, In

Europe nearly 25 years
Long distance
Locomotives Very High speed
High speed
Interurban
Regional
Tram Metro
Speed
!47
320 km/h 300 km/h 230 km/h
TGV Duplex (France) AVE (Spain) New Pendolino (Italy)
200 km/h 300 km/h
Virgin West Coast Pendolino (UK) KTX (South Korea)
!48
Transportation System
and Travel Demand
3 ways /Modes of transport
1) Land
-Railway
-Highway
-Pipeline
3 ways /Modes of transport
2) Sea
3) Air
!51
Which mode has the most problems??
!52
Why people like cars?
❖ We like the cars

❖ It often (but not always) is the fastest mode,
depending on levels of congestion, time of day
and the available alternatives
❖ Privacy
❖ Automobiles suggest that you are at a higher
level of society
❖ People simply enjoy the sensation of driving
!53
Importance of Transportation
• Necessary for economic growth, but not

sufficient
❖ The speed, cost, and capabilities of available
transportation have a significant economic
impact on an area
❖ Countries with better/advanced
transportation networks and services are
leaders in industry and commerce
• USA, Japan, Germany, ...
!54
Importance of Transportation
❖ Determines the location and character of

cities and regions by interacting with land
use (e.g. silk road)
❖ National security
!55
Components of the Transportation System
❖ Infrastructure (supply):
➢ Physical facilities: highways, railroads, ports
➢ Transfer points: parking areas, driveways
➢ Supporting elements: signals, signs, safety
hardware, etc.
❖ Vehicles (demand): Planes, trains, autos, buses,
ships, trucks
❖ Operators/users: Drivers, pilots, freight,
passengers
!56
Development of Transportation Network
❖ Planning
❖ Design
❖ Construction
!57
What is transportation planning?
Activities that:
1. Identify problems, gather and analyze data

2. Forecast future traffic demands and
estimate the environmental and social
impacts
3. Evaluate alternatives and determine the
alternative that meet the requirements and
constraints of the problem at the lowest
cost
!58
The 4 step transport planning process
Demographic Step 1: Trip

Data Generation OUTPUT
•Estimated trips
Transportation Step 2: Trip
•Estimated modal
Network Distribution shares
•Estimated travel
Step 3: Mode speeds
Choice
•Estimated travel
delays
Step 4: Trip/ Traffic
Assignment
!59
Trip Generation
Trip generation
• Decision to travel for a

specific purpose (e.g. eat
lunch)
➢ How much do people use
the transport system?
➢ Why do people use the
transport system?
➢ Where can different types of
activities be satisfied?
Potential
!60
Trip Distribution
Trip distribution
• Choice of destination (a
particular restaurant? The
nearest restaurant?)
➢ Given a location, where
do people go to satisfy
demand for an activity
type?
➢ Determine origin and
destination of trips
Travel demand
Mode Choice
Mode choice
• How do people use the

transport system?
– What modes do they
choose
(transit, walk, carpool, drive
alone,…)?
– How do they react to
varying
transport service quality?
Transport demand
Trip / Traffic Assignment
Route choice
• How do people use the
transport system?
– Given a mode, which route
do they choose (e.g. E-5..)?
– Which parts of the transport
system do they use?
Assigned flows
Demographic Data
• Household size
• Income level
• Autos per
household
Trip Generation
Network Data
❖ Highway network
❖ Transit network
Context for
Transportation Systems
Analysis
Context for Transportation Systems Analysis
❖ Conceptual View of TSA

❖ Models and Prediction
❖ Prediction in Context: Analysis and
Implementation
Source: Manheim, M, Fundamentals of Transportation Systems Analysis, 1979
A Conceptual View of TSA
3 elements in transport system problems

III
T
❖Transport system, T
I
❖Activity system, A F
❖Flow pattern, F
A II
A Conceptual View of TSA
3 types of inter-relationships:
Type I: Flow determined by both Transport and Activity systems

• the short-run "equilibrium" or outcome
• many problems are dynamic rather than static
Type II: Flow pattern causes change over time in the Activity system through
services provided and resources consumed
Type III: Flow pattern also causes changes over time in the Transport system
• transport operator adds service on a heavily-used route
• new highway link constructed
Models and Prediction
Options
Technology
Networks
Impacts
?
Link characteristics
User
Vehicles
Operator
System operating Physical
policies
Organizational Functional
policies
Governmental
Travel options
Other
activity
options
Figure by MIT OpenCourseWare.
Models and Prediction
Options
Technology
Networks Service Resource Impacts

model model
Link characteristics User
Equilibrium
model Operator
Vehicles
System operating Demand Activity Physical

policies model shift
model Functional
Organizational
policies
Governmental
Travel options
Other activity
options
Source: Manheim, M, Fundamentals of

Transportation Systems Analysis, 1979
Prediction in Context
Options Impacts
S R
T
E
A
D A
A. Prediction
Options Impacts
T
Search Evaluation and Choice
Prediction
A
B. Analysis Cycle
Source: Manheim, M, Fundamentals of

Transportation Systems Analysis, 1979
TRANSPORTATION
DEMAND AND SUPPLY
Transportation Demand And Supply
❖ Market demand function

➢ Represents behavior of users
❖ Market supply function
➢ Represents congestion and behavior of
service providers
❖ Supply/Demand Interaction: Equilibrium
!75

Equilibrium
Price
S
P0
D
Q0 Quantity
Shifting Curves
Price
S
S’
P0
?
D D’
Q0 Quantity
Comparative Statics
❖ Create a model of market behavior:

– Explain consumer and firm choices as a function of
exogenous variables, such as income and government
policy
❖ Develop scenarios:
– Changes in exogenous variables
❖ Derive changes in the endogenous
variables
Comparative Statics Example
The market for taxi service:
● Supply model: QS = -125 + 125P
● Demand model: QD = 1000 – 100P
● Where does the market clear?
● What happens if demand shifts such that now QD = 1450 –

100P ?
The Solution
Price
S
D’
D
500 750 Quantity
Consumer Behavior
How do we characterize a consumer?
● Preferences across goods

● Prices of goods
● Budget available to spend on those goods
Utility Function
● A function that represents the consumer’s preferences ordering

U = f(x1, x2, …, xm)
Consumption levels of goods 1..m
● Utility functions give only an ordinal ranking:

– Utility values have no inherent meaning
– Utility function is not unique
– Utility function is unaffected by monotonic transformation
Consumer Behavior
● Assumed behavior by consumer: utility maximization subject to

budget constraints
● When facing prices p and having income I, consumer allocates
income across goods so as to maximize utility.
● Problem: Max U(x1,…, xm) subject to
∑ px ≤I
i i
i=1
Demand Function
● Optimal consumption bundle X*

● By varying price p and income I and solve for X*, we derive the
demand function X*(p, I)
I3
I2
I1
X*
Consumer Welfare
Price
Welfare gainfrom
decrease in price
Price_0
Price_1
Demand
Quantity
Firm Behavior
How do we characterize a firm?
● The technology and inputs for creating products

● The prices of the required inputs
● The demand for the firm’s product(s)
Production
● Technology: method for turning inputs (including raw

materials, labor, capital, such as vehicles, drivers,
terminals) into outputs (such as trips)
● Production Possibility Set: quantities of output possible
given levels of input
Possibility Set
● The firm may choose to produce any element in its production

possibility set
● Example: taxi services and drivers
Taxi service
y2
Possibility Set
y1
Drivers
Production Functions
● Simplified form: q = f(z)
– q: output; z: inputs
● Isoquants for two-input production:
Capital (K)
q=f(K,L)
K*
q3
q2
q1
Labor (L)
L*
Production Functions
● Does the technology allow substitution among inputs or not?
Automated Taxis
Perfect Substitutes Fixed-Proportions
buses
q3
q3 q2
q2 q1
q1
Taxi drivers
Cost Functions
● Now consider input price vector w.

● Assume efficient behavior by firm: produce output q for the
lowest possible cost.
● Therefore, cost function is:
c(w,q) = min w·z
z
subject to q = f(z)
● This function describes the cost of producing any feasible
level of output.
Firm Objective
● Maximize profit
● Maximize revenue when cost is fixed
● Minimize cost when prices are fixed
Profit Maximization
● Firm maximizes: profit = revenue - cost

π ( q ) = p•q – c(q)
● General result: MR(q) =
MC(q) MR: marginal
revenue
MC: marginal cost
● For a competitive firm, p is fixed
– MR = p
– Quantity supplied is determined such that MC = p
Introduction to
travel demand
Introduction to travel demand
Transportation Demand Analysis
● Use models to understand complex processes
– Transit ridership
– Sprawl
– Congestion pricing
– Traveler information systems
– Jobs-housing balance
● Assist decision making
Choices Impacting Transport Demand
● Decisions made by Organizations

– Firm locates in Boston – Firm locates in Waltham
– Firm invests in home offices, high speed connections
– Developer builds in suburbs – Developer fills in in downtown
● Decisions made by Individual/Households
– Live in mixed use area in Boston – Live in residential suburb
– Don’t work – Work (and where to work)
– Own a car but not a bike – Own a bike but not a car
– Own an in-vehicle navigation system
– Work Monday-Friday 9-5 – Work evenings and weekends
– Daily activity and travel choices:
what, where, when, for how long, in what order, by which mode
and route, using what telecommunications
Discrete Choice Analysis
●Method for modeling choices from among
discrete alternatives
●Components
– Decision-makers and their socio-economic characteristics
– Alternatives and their attributes
●Example: Mode Choice to Work

– – Alternatives:
Decision Auto and Bus
maker: Worker
– – Attributes:
Characteristics: Travel
Income, Cost, Travel Time
Age
Role of Demand Models
● Forecasts, parameter estimates, elasticities, values of time, and

consumer surplus measures obtained from demand models are
used to improve understanding of the ramifications of alternative
investment and policy decisions.
● Many uncertainties affect transport demand and the models are
about to do the impossible
THANK YOU FOR LISTENING
Cbmjr.mnl@gmail.com
0922-804-0084

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San Beda University

College of Arts and Sciences

Transportation and Economics

Conceptual Overview of Transportation Economics

Economic Characteristics of Transport

Importance of Transportation Economics in Economic

Transportation System and Travel Demand

“the study of how people and society end up

o Transportation refers to the movement of

Transportation, from the economist’s viewpoint:

❖ Transportation economics, while considered a

❖ Transportation economics specifically addresses:

o Most individuals have a basic need to travel

o The development of the world wide web: Transportation

o Economics is one of the social sciences, concerns

o Thus if a particular society does not have sufficient

o These three concepts of scarcity, choice and

1. The most important characteristic of transport is

2. Another characteristic is that transport demand

3. Transport is often divided into fixed and mobile

❖ Transportation facilities such highways and

❖ Transportation agencies at all levels of

❖ Transportation agencies at all levels of

❖ Transportation agencies at all levels of

❖ The management of transportation assets

1860 1893 1923 1948

Gasoline power + Electric power

Year: 1804 Year: 2008

Railway In Japan nearly 40 years, In

Locomotives Very High speed

TGV Duplex (France) AVE (Spain) New Pendolino (Italy)

200 km/h 300 km/h

Virgin West Coast Pendolino (UK) KTX (South Korea)

❖ We like the cars

• Necessary for economic growth, but not

❖ Determines the location and character of

1. Identify problems, gather and analyze data

Demographic Step 1: Trip

• Decision to travel for a

• How do people use the

❖ Conceptual View of TSA

Source: Manheim, M, Fundamentals of Transportation Systems Analysis, 1979

3 elements in transport system problems

Source: Manheim, M, Fundamentals of Transportation Systems Analysis, 1979

Type I: Flow determined by both Transport and Activity systems

Source: Manheim, M, Fundamentals of Transportation Systems Analysis, 1979

Figure by MIT OpenCourseWare.

Source: Manheim, M, Fundamentals of Transportation Systems Analysis, 1979

Networks Service Resource Impacts

System operating Demand Activity Physical

Figure by MIT OpenCourseWare.

Source: Manheim, M, Fundamentals of

Figure by MIT OpenCourseWare.

Source: Manheim, M, Fundamentals of

❖ Market demand function

Transportation Demand And Supply

❖ Create a model of market behavior:

● What happens if demand shifts such that now QD = 1450 –

How do we characterize a consumer?

● Preferences across goods

● A function that represents the consumer’s preferences ordering

● Utility functions give only an ordinal ranking:

● Assumed behavior by consumer: utility maximization subject to