ETHIOPIA TECHNICAL UNIVERSITY

COURSE
NAME
Transportation Planning and
Economics

TITLE Chapter Three

Introduction to Transport Economics

NATNAEL MELSEW (MSc.)

Road and Transport Engineer
nathanmelsew@gmail.com
 Outlines 2

• Introduction
• Transportation Demand and Supply
• Factor Affecting Elasticity

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Melsew
 Introduction to Economics 3

What is Economics?
• Economics is a social science concerned with the
 Production
 Distribution
 Consumption
of goods and services
• It studies how individuals, businesses, governments, and
nations make choices about how to allocate resources
• The building blocks of economics are the studies of
 labor
 trade

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 Introduction to Economics 4

• Generally economics Can be classified in to two

i. Macroeconomics
ii. Microeconomics
Macroeconomics
• Which concentrates on the behavior of the economy as a
whole
Example:- foreign trade, monetary policy, unemployment rate
Microeconomics
• Which focuses on individual people and businesses (behavior
of individual consumers and producers)

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 Introduction to Economics 5

Economic Indicator
• A piece of economic data, usually of macroeconomic scale,
that is used by analysts to interpret current or future
investment possibilities
• Most common indicators are
1. Gross Domestic Product (GDP)
2. Consumer Price Index (CPI)
3. Retail Sales
4. Employment Data (Unemployment Figure)
5. Price of Crude Oil

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 Introduction to Economics 6

• There are four key economic concepts which can help

explain many decisions that humans make.
 Scarcity
 Supply and demand
 Costs and benefits
 Incentives

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 Introduction Transport Economics 7

What is Transportation Economics?

• Is the study of how scarce productive resources are used to
produce and distribute various transportation services for
consumption by the society.
• If we are going to talk about economics there is some basic
terms we need to deal with and this are
 Supply
 Demand
• Basically economics mainly analyze
 Cost
 Benefit

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 Introduction Transport Economics 8

• The study of economics divide in to two categories

i. Micro-economics
ii. Macro-economics
i. Micro-economics
• Behavior of relatively smaller entities such as firms and
individuals
ii. Macro-economics
• Wealth of society on a regional scale and deals with the
behavior of aggregate concepts

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 Introduction Transport Economics 9

Scope of Transport Economics

• Transportation economics, mainly associated with certain
unique issues 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 intervention in policies and regulations
in transportation

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 Introduction Transport Economics 10

• In general transportation economics specifically addresses

 Demand of transportation services
 Supply of transportation facilities
 Elasticities of demand and supply
 Price mechanisms
 Transportation cost analysis

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 Transportation Demand and Supply 11

1. Analysis of Transportation Demand

• The demand of goods and service highly depend on
 Consumer Income
 The price of particular goods and service
• For Example: - the choice of travel mode depends on
 The purpose of the trip
 The distance traveled
 The income of the traveler

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 Transportation Demand and Supply 12

A demand function
• It represents the willingness of consumers to purchase the
product at alternative prices
Price, p

Demand
Function
Curve

Quantity, q
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 Transportation Demand and Supply 13

• When we are dealing with travel demand, its price of trip

will also include out of pocket costs such as
 Travel time including access, waiting, and in
vehicle time
 Comfort
 Safety
 Convenience
 Reliability
• Most of the components of the perceived price for travel
can be measured and expressed in monetary units

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 Transportation Demand and Supply 14

•  The demand function always assumes those factors

 Income
 Population
 Socio-economic Characteristics
• If we consider a linear relation between demand and price
then

• The demand function is drawn with the negative slope

• Where a decrease in perceived price usually results in an
increase in travel, although this is not always true

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 Transportation Demand and Supply 15

• Even if change in price has a significant effect, there are

some alternative-specific attributes which affect the
demand
 Travel time
 Comfort
 Convenience
• For example lets see the effect of those attributes
1. Increase in unemployment rate
2. Reduction in comfort
3. Congestion (Longer travel Time)

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 Transportation Demand and Supply 16

• Lets see the impact of different attribute at a fixed price

Price, p

Demand
Function
Curve

D2
D1
D3

Quantity demanded, q

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 Transportation Demand and Supply 17

• With in the context of transportation economics trip makers

will be considered as a consumer (demand)
• There are two type of demand function
a. Disaggregate Demand Function
b. Aggregate Demand Function
a. Disaggregate Demand Function
• Predict the behavior of a single consumer in response to
changes in future conditions
b. Aggregate Demand Function
• Predict the behavior of a group of consumers such as a
household, in response to changes in future conditions

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 Transportation Demand and Supply 18

2. Analysis of Transportation Supply

• Supply of a transportation product represents the quantity of
that product a producer is willing to offer at a given price
• Higher Price result more profit which will end up in an
increase in supply
• Supply mainly affected by the following basic factors
 Technology
 Government intervention through policy
 Regulation

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 Transportation Demand and Supply 19

• Increase in supply is always related to

 Increasing the fleet size of a transit company
 Building new roads
 Increasing the number of lanes for existing roads
• But we can increase supply without any physical
enlargements of the road network
For Example: Using Intelligent Transportation Systems (ITS)

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 Transportation Demand and Supply 20

• The supply curve will have the following look

S2
S1
S3
Price, p

Supply
Function
Curve

Quantity supplied, q

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 Transportation Demand and Supply 21

Equilibrium Transportation Demand and Supply

• Equilibrium is said to be attained
 When the factor that affect the quantity demanded and
those that determine the quantity supplied result inbeing
statically equal
• There is a point on the curve which the demand and supply
curve will intersect and that is called Equilibrium

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 Transportation Demand and Supply 22

• In graph S

Price, p

Point of
Equilibrium

Quantity, q

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 Transportation Demand and Supply 23

Example1: The travel time on a stretch of highway lane connecting two

activity centers has been observed to follow the equation representing
the service function:
t = 15 + 0.02v

where t and v are measured in minutes and vehicle per hour

respectively.
• The demand function for travel connecting the two activity centers is
v = 4000 – 120t.
a) Sketch these two equations and determine the equilibrium time and
speed of travel.
b) If the length of the highway lane is 20 miles, what is the average
speed of vehicles traversing this length?

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 Transportation Demand and Supply 24

•  Solution

t (min)
t = 15 + 0.02v t = 15 + 0.02t
v = 4000 – 120t
a) Solving these two equations (647, 27.29)
v = 647 vehicle/hr.
v = 4000 - 120t
t = 27.94 minutes
b) Therefore average speed
V (mph)

(20 × 60)/27.94 = 42.95 mph

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 Factors Affecting Elasticity 25

Sensitivity to Travel Demand

• Sensitivity is mainly related to change in transportation
demand caused by change in the attribute
• When we talk about change in demand may be estimated in
form of the following
 Change in demand in response to unit change in
attribute
 Change in demand in response to unit percent
change in attribute
 Percent change in demand in response to unit
percent change in attribute

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 Factors Affecting Elasticity 26

•  When calculating elasticity of demand there are two possible

ways.
i. Point elasticity
ii. Arc elasticity
Point Elasticity
• The elasticity of demand at a particular point on a curve (or
between two points).

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 Factors Affecting Elasticity 27

•  Arc Elasticity
• A demand measures elasticity at the midpoint between the
two selected points.

If we consider linear demand curve

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 Factors Affecting Elasticity 28

• Elasticity classified in two categories

a. Elastic
b. Inelastic
a. Elastic
• If the quantity demand of the product changes more than
proportionally when its price increases or decreases
Example
• If the travel cost of mini-bus taxi from Gebiya to Adisalem
increase from 5 birr to 10 birr while there is no increment in
price for other mode of transport like Bajaj or buses
Question: What do you think about this Scenario?

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 Factors Affecting Elasticity 29

b. Inelastic
• If the quantity demand of the product changes very little
when its price fluctuates.
• For Example: - An increment in fuel cost will not have a
significant impact on the demand of travel no mater the
traveling cost fluctuates.

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 Factors Affecting Elasticity 30

Example 3: Point Elasticity

• An aggregate demand function is represented by the equation
q = 200 – 10p
• where q is the quantity of a good, and p is the price per unit.
Find the price elasticity of demand when
q = 0, q = 50, q = 100, q = 150, q = 200 units
• corresponding to
p = 20, p = 15, p = 10, p = 5, p = 0 cents

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 Factors Affecting Elasticity 31

• 
Solution:

•Substituting for price p using the equation

of demand will give us

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 Factors Affecting Elasticity 32

Discussion
• As the e > -1 the price change will result high amount of
change in demand which means the elasticity becomes
elastic.
• As the e is between 0 and -1 the price change will not have a
bigger effect on demand

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 Factors Affecting Elasticity 33

•  Example 4: Arc Elasticity

• When admission rate to an amusement park was $5 per visit,
the average number of visits per person was 20 per year.
Since the rate has risen to $6, the demand has fallen to 16 per
year. What is the elasticity of demand over this range of
prices?
Solution:
• Arc price elasticity

• Therefore, it is elastic since 1.22 > 1

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 Factors Affecting Elasticity 34

• Attributes for which facilitate the change in demand have

two categories
1. Characteristics of the Transportation System: - Such as
 Price and level of service associated with a given
mode
 Price and level of service of competing modes
2. Characteristics of the Socio-economic System: - Such as
 Income
 Level of employment
 Household size
 Car ownership

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 Factors Affecting Elasticity 35

•  Generally factors affecting elasticity of demand are

a. Income Elasticity
b. Price Elasticity
a. Income Elasticity
• Generally defined as the change in demand in response to a
unit change in income
• Most commonly used in disaggregate demand modeling

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 Factors Affecting Elasticity 36

• In transportation economics a good is classified in to three

category
i. Normal Good
 If there is a direct relationship between the demand for
that commodity and the income of the consumer
ii. Superior Good
 If it goes up in demand when a consumer income
increase and its share in income also goes up(ei > 0)
iii. Inferior Good
 If the demand for the good goes down when a consumer’s
income goes up

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 Factors Affecting Elasticity 37

b. Price Elasticity
• Change in demand for a good in response to a unit change in
the price of the good
• The level of price elasticity depends on factors such as
a. Price of rival goods
b. Income-share of the good
c. The scope of definition of the good
d. Whether the good is considered a luxury or a
necessity

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 Factors Affecting Elasticity 38

a. Price of rival goods

• A consumer who spends a substantial percentage of income
on a particular good is more likely to seek a substitute good
when the price of the good increases
b. Scope of definition
• Goods that have narrow definitions are more likely to have
more substitutes, and are therefore expected to have a more
elastic demand

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 Factors Affecting Elasticity 39

c. Price and availability of rival goods

• The lower the price and greater availability of substitutes,
the greater the elasticity of demand of the good with respect
to price.
d. Luxury vs. substitute goods
• Goods that are considered necessities typically have price
inelasticity’s
• While luxury goods are relatively elastic

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 Factors Affecting Elasticity 40

•  Elasticity and Total Revenue

• Total Revenue in economics refers to the total receipts
from sales of a given quantity of goods or services

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 Factors Affecting Elasticity 41

Example
• A bus company’s linear demand curve is P = 10 – 0.05Q,
where P is the price of a one-way ticket, and Q is the number
of tickets sold per hour. Determine the maximum revenue
along the curve.
P = 10 – 0.05Q
R = Q(10 – 0.05Q) where R = total revenue
R = 10Q – 0.05Q2
dR/dQ = 10 – (0.05 × 2) Q
dR/dQ is equal to zero when R is maximum
Therefore, Q = 100 when R is 500 (maximum)
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 42

THANK YOU

Natnael
Melsew