83 terms

Transport Economics

Exam Date: 23/06/16 Duration: 2hr
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what is transport
The Movement of Goods and People for Personal and Business Reasons
mode of transport
The means of transport, e.g. Road, Rail, Sea and Air
transport infrastructure
Anything that provides for the operation of transport, e.g. motorways, rail tracks
difference between passenger transport and freight transport
passenger transport carries people and freight transport carries goods
derived demand
demand that is determined by demand for another good or service
why is demand for transport derived demand
as the economy grows, employment rises, and so should transport demand as more people try to get to work/more goods are delivered
what components determine transport demand
Costs of running a particular mode especially compared to other modes, income, size of household, quality factors, speed, convenience etc
ways of measuring transport demand
Volume Measures using the number of journeys and the distance travelled, passenger km and tonne km
peaked demand
Demand for Transport highest in holidays, rush hour etc - is not spread evenly over the year
transport demand forecasting
A prediction about future trends
assumptions made during a transport demand forecast
GDP, Fuel Prices, Population Growth, Future Transport Policy etc...
why do we make transport forecasts
To determine future transport network needs ->
"predict and provide", To estimate where the biggest traffic bottlenecks are likely to occur, To be able to forecast the effects of certain policies
how do governments rely on transport forecasts too heavily
They can be inaccurate, Unpredictable events may occur 9/1, Use them to set their goals, rather than set targets and then aim to achieve them
fixed costs
Costs that stay the same, regardless of the output produced E.g. Rent, Salaries, runway slot cost
variable costs
Costs that are directly related to the level of output
E.g. Fuel, Wages, if output needs to increase you will need more raw materials so raw materials are a variable cost
total cost
Total Cost of Providing a Service so Fixed Cost + Variable Cost
Average Cost
cost per unit so the total cost divided by the quantity produced
marginal cost
Cost of making one extra unit
Total Revenue
number of units sold x price per unit
Average Revenue
total revenue divided by price per unit
marginal revenue
Revenue gained from selling one extra unit
LRAC
Long Run Average Cost
Price Makers
Firm that has control over the market price
Price Takers
Firm in a competitive market that has to accept the market price
types of economies of scale
technical, purchasing, managerial, financial and risk bearing
Technical Economies
Increased capacity/technology resulting in lower LRAC...
larger companies enjoy more specialisation and can invest more heavily in capital which will increase levels of productivity
Purchasing Economies
Reduced Unit Costs due to Bulk Buying...Cost savings that arise from buying in bulk or from a more powerful relationship with a supplier due to increased output
risk bearing economies of scale
When a business has a single product, a single market or perhaps a single new product, is highly vulnerable if the product fails. Businesses with many products/markerts are diversified and can spread risk by offsetting losses in one area against profit elsewhere.
Managerial Economies
Savings in LRAC due to specialised management...possible when output is high enough to justify hiring specialists to perform specific management tasks
Financial Economies
Cost savings made when large firms borrow...small firms often have to pay higher interest rates on loans since they are perceived by financial organizations to carry a higher level of risk.
economies of scale
The downward part of the long-run average total cost curve where LRAC falls as production increases... Factors that cause a producer's average cost per unit to fall as output rises.
example of economies of scale in transport
A380 Airbus can carry a lot of extra passengers
The amount of passengers on the plane is bigger and so they can spread out the cost more and buy everything in bulk ie fuel
diseconomies of scale
An economic concept referring to a situation in which economies of scale no longer function for a firm. Rather than experiencing continued decreasing costs per increase in output, firms see an increase in marginal cost when output is increased.
diseconomies of scale on a graph
The upward part of the long-run average total cost curve where LRAC rises as output rises
how does loss of direction and co-ordination cause diseconomies of scale
It is more difficult for managers to supervise their employees and check that everyone is working together effectively, manager may be forced to delegate more tasks leaving them in less control
how does lack of motivation cause diseconomies of scale
Workers can often feel more isolated and less appreciated in a larger business and so their loyalty and motivation may diminish damaging output and quality, productivity levels fall and an there becomes an increase in average labour costs per unit
how does poor communication cause diseconomies of scale
As the business expands communicating between different departments and along the chain of command becomes more difficult as there are more layers in the hierarchy that can distort a message and managers in in control of more people, this may result in workers having less clear instructions from management and less face-to-face meetings
industrial relations
relation of Individual or group of employee and employer for engaging themselves in a way to maximize the productive activities
Profit Maximisation
Making as much profit as possible in a given time period...MC=MR
profit satisficing
Making a level of profit (not maximum) sufficient for stakeholders
Sales Revenue Maximisation
Objective where MR = 0 in order to increase Market Share
Sales Maximisation
Maximising volume of sales; sales up to the break even point
profit
The difference between revenue and costs
normal profit
Minimum level of profit; keeps a firm engaged in its activity
abnormal
very high profit
Productive Efficiency
Using the least possible amount of scarce resources for max output to have the minimum average cost
Allocative Efficiency
Using scarce resources to produce goods most needed and wanted so price (that a unit is being sold for) = marginal cost (so no less or more than what consumers value a unit is being produced)
barriers to entry
Obstacle/Deterrent to new firms entering a market
high entry and exit costs
costs that the new firm entering and exiting the market in the future will have to incur in order to start up the business to make it competitive to other existing firms in the market ie buying the buses for a new fleet
sunk costs
a cost that has already been incurred and thus cannot be recovered
how are Economies of Scale a barrier to entry
existing firms that are larger and more established can exploit economies of scale and get their average cost much lower than new firms entering the market
how is Size of Existing Firms a barrier to entry
they have already managed to become established despite the barriers to entry of the market, they will have grown in size and most likely have a large market share, it will be hard to compete with these firms as they may already be heading towards a monopoly
Legal Barriers
the law may give some firms particular privileges. Patent laws can prevent competitor firms from making a product for a given number of years after its invention. The government may also give a firms exclusive rights to production.
Brand Loyalty
deeply held commitment to rebuy a product or service regardless of situational influences that could lead to switching behavior, PED for products with high brand loyalty will almost be inelastic ie everyone still buys iPhone's despite the fact samsung could release an even better phone for less money
monopoly
1 Firm in a Market
Pure Monopoly
a firm that has 100% Market Share
Monopoly Power
a firm that has 25% Market Share
Natural Monopoly
More than 1 firm would result in a wasteful duplication of resources ie water suppliers in one area
features of a monopoly
Massive Barriers to Entry, Abnormal Profit in both short and long run, Price Maker, High Prices, Low Output and can exploit economies of Scale
what can price axis on a monopoly graph also represent
the firms costs
what can the quantity axis on a monopoly graph also represent
the firms output
what shape is the marginal cost curve on a monopoly graph
nike tick
at what point of output along the quantity/output axis on a monopoly graph is most profit maximizing
the point created when you follow the line from MC=MR equilibrium down to the x axis
how do you find the market price on a monopoly graph
follow the line up from the MC=MR equilibrium until it hits the demand curve then draw a horizontal line across to the price axis and that will give you market price
how to create the revenue box on a monopoly graph
make a point where the vertical line cutting through the MC=MR (profit maximising point) also cuts through the average cost curve then draw a horizontal line from this point to the y axis
what happens in average cost is too high on a monopoly graph
when you carry on the vertical line that goes through MC=MR to hit the AC curve and then bounce the line across to the x axis, you will see that average cost is higher than the amount the firm is receiving per unit (price)
disadvantage to consumers of monopoly
monopolies are inefficient as there is less choice, failure to innovate or react to consumers, no incentive to cost minimize and so lack of allocative efficiency etc
advantages of a monopoly
monopolies may not have the incentive to cost minimise but can do so anyway with economies of scale and Abnormal Profit can be a good source for investment and innovation
whats the difference between monopolistic competition and a monopolistic market (monopoly)
A monopolistic market is an economic market structure that exists when there is only one supplier of a particular good or service (monopoly) whereas monopolistic competition involves many suppliers that distribute products that are slightly different
monopolistic competition
a market structure in which many companies sell products that are similar but not identical
features of monopolistic competition
Product Differentiation, Number of small firms, Low Barriers to Entry, Weak Brand Loyalty, Short term Abnormal Profit which will be competed away by new entrants in the long run, they are competing to get a monopoly but likelihood is that they will never be one
oligopoly
A market structure in which a few large firms dominate a market
features of an oligopoly
each firm has a High Concentration Ratio and all have Combined Market Share, theres only a few, dominating large firms and several smaller firms, Interdependent, High Barriers to Entry, Possibility of collusion and are Price Makers, engage in Non Price Competition ie Excessive Advertising, Offers etc
collusion
collaboration; complicity; conspiracy, work together to try to exploit consumers and/or other firms in the market to make as much profit as possible/try push other firms out of the market
interdependent
Influencing or relying upon one another
what type of competition do oligopolies work with
non-price competition
non-price competition
where there is a very strong expectation of what the price for a product should be many businesses engage in non-price competition by using advertising, free-product offers or bonus packaging to differentiate their product
why do oligopolies use non-price competition
To raise price would cause customers to switch away; to lower price would cause a price war between the other dominating firms, this is called price 'stickiness' or 'rigidity'
where are kinked demand curves applicable to markets
in an oligopoly
kinked demand curve
theory states that oligopolists have a greater tendency to respond aggressively to the price cuts of rivals but will largely ignore price increases, where a change in price of one firms products will cause demand to change (go up) rapidly and so elastic, but then because oligopoly competitors see the price drop they drop theirs too and the change in price now has little effect on demand making it inelastic
perfectly contestable market
A market with free and costless entry and exit. Keeps prices down and produces as efficiently as possible.
is there an existence of perfectly contestable market
no a perfectly contestable market doesnt exist
features of a perfectly contestable market
no entry or exit barriers, Any number of suppliers, Pool of potential new entrants/threat of hit and run entry and exit tactics, Economic Efficiencies Met, Normal Profit short and long run
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