The Importance of Transportation Economics Serdar AYAN Phd

  • Slides: 16
Download presentation
The Importance of Transportation Economics Serdar AYAN, Phd. Visiting Professor

The Importance of Transportation Economics Serdar AYAN, Phd. Visiting Professor

Transportation and Economics n Economics is the study of how societies use scarce resources

Transportation and Economics n Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.

Importance of Transportation 1. Transportation Provides the Opportunity for Economic Specialization – Comparative Advantage

Importance of Transportation 1. Transportation Provides the Opportunity for Economic Specialization – Comparative Advantage - Transportation allows countries or regions to produce what they produce best and then trade - The specialization that results from the ability to exchange results in a higher standard of living for the exchanging regions

Importance of Transportation n Should A area produce oranges or should it get them

Importance of Transportation n Should A area produce oranges or should it get them from B? Since labor, land, and capital could much more efficiently produce wheat than oranges, there is a high opportunity cost of producing oranges in A – Supply should be limited n A citizens like citrus fruit as much as anybody, and substitutes are not readily available – Demand should be strong in A n

Importance of Transportation n Should A produce oranges or should it get them from

Importance of Transportation n Should A produce oranges or should it get them from B? Supply P EU 6 2, 000 A Market for Oranges in Isolation If A produced its own oranges, the price per pound would be 6 EU, and 2, 000 pounds per week would be sold -at prices lower than 6 EU, there is excess demand – few would be willing to supply oranges at lower prices and a lot would want to buy them at that price Demand - at prices above 6 EU there is excess supply Q

Importance of Transportation n Should A produce oranges or should it get them from

Importance of Transportation n Should A produce oranges or should it get them from B? P Supply EU 2 Demand 5, 000 B Market for Oranges in Isolation Q

Importance of Transportation Should A produce oranges or should it get them from B?

Importance of Transportation Should A produce oranges or should it get them from B? B A Amount Traded S S Excess Supply EU 6 4 3. 5 2 D D 1, 500 3, 500 4, 500 6, 500 Excess Demand 2, 000

Importance of Transportation 2. Transportation Allows Firms to Take Advantage of Scale Economies n

Importance of Transportation 2. Transportation Allows Firms to Take Advantage of Scale Economies n Economies of Scale – Average costs decrease with increased production n Example Suppose A and C Each Demand 20, 000 Loaves of Bread per Day The Transportation Rate Between A and C is 0. 10 EU per Loaf

Importance of Transportation EU . 50 Average Cost . 30 20, 000 40, 000

Importance of Transportation EU . 50 Average Cost . 30 20, 000 40, 000 Q

Importance of Transportation n If each community produces 20, 000 Loaves n Total Costs

Importance of Transportation n If each community produces 20, 000 Loaves n Total Costs = 20, 000 EU n n Production costs = 40, 000 (. 5) = 20, 000 EU Transportation costs = 0 EU n If C or B produces all 40, 000 loaves and ships 20, 000 to the other n Total Costs=14, 000 EU n n Production costs =40, 000(. 3) = 12, 000 EU Transportation costs = 20, 000(. 1) = 2, 000 EU

Importance of Transportation 3. Transportation Has an Impact on Land Prices and Land Uses

Importance of Transportation 3. Transportation Has an Impact on Land Prices and Land Uses n Example : Milk farmers gain profits by selling milk in the market n n Land prices are determined by values placed on land for alternative uses For milk producers, the value of a particular parcel of land depends on how good it is for producing milk and how costly it is to get that milk to customers

Importance of Transportation n Assume that all land is equally good for producing milk,

Importance of Transportation n Assume that all land is equally good for producing milk, and that all customers are in the central city n The value of owning a parcel of land for a year will be a function of the yield of milk that land can produce in a year, the market price of milk, the production cost of milk, and the transportation cost to the market (which depends on distance to the market) n Rent = Yield*(mkt prce/unit – cost/unit) – Yield*transp. cost/unit-mile * distance

Importance of Transportation n Assume the following: n Yield=10, 000 gallons per acre n

Importance of Transportation n Assume the following: n Yield=10, 000 gallons per acre n Market price=3 EU per gallon n Prod. Cost=1 EU per gallon n Transp. Cost=. 05 EU per gallon per mile n Rent at the city center = 10, 000(3 -1)-10, 000(. 05*0) =20, 000 EU n Rent 5 miles away = 10, 000(3 -1)-10, 000(. 05*5) = 17, 500 EU

Importance of Transportation n As you move further from the city center, the value

Importance of Transportation n As you move further from the city center, the value of land goes down Rent Per Acre Distance from City Center n Depending on other economic opportunities, milk producers may be outbid at locations near the city center for land Beef Production Rent Per Acre Milk Production Distance from city center

Importance of Transportation 4. Transportation expands the size of markets available to firms 5.

Importance of Transportation 4. Transportation expands the size of markets available to firms 5. Transportation reduces the prices of goods to consumers, and increases the variety of goods available 6. Transportation provides personal mobility for individuals

Importance of Transportation 7. Transportation accounts for a large portion of the Turkish economy

Importance of Transportation 7. Transportation accounts for a large portion of the Turkish economy 8. Transportation has an impact on the environment and consumption of energy