Transport economics

keywords

Define: Transport
The movement of people and goods for
personal and business reasons
Profit
The difference between revenue and costs

Define: mode of transport

Means of transport, basically road, rail, air
and sea transport
Infrastructure
Anything that provides for the operation of
transport

Define: Derived demand

Demand that depends upon the final
output that is produced
Forecast
A future estimate usually based on past
information

Define: Privatisation
Sale of state-owned business activity to
the private sector

Demand

Is the quantity of a product consumers are wiling and able to buy at a

particular price in a specified time period. Data to draw the curve is from a
demand schedule.
Define :Effective demand
When a consumers desire to buy something is backed up by a willingness
and an ability to pay for it
Define: National (Latent) Demand
Exists when there is a willingness to purchase a good or service, but where
the consumer lacks the real purchasing power to be able to afford the product.
Derived demand
Where demand for one good/service occurs as a result of demand for
another. E.g. demand for coal, leads to mining
Speculative Demand
Potential buyers are interested not just in the satisfaction they may get from
consuming the product, but the potential rise in market price leading to capital
gain or profit

Elasticity
The extent to which buyers and sellers respond to
change in market conditions
Define: market power
Market power refers to the ability of a firm to influence or
control the terms and condition on which goods
What is a contestable market?
A contestable market has no entry barriers - firms can
enter or leave an industry costlessly. The threat of
potential entry encourages imperfectly competitive to set
price and output at or close to the perfectly competitive
price and output.

Define asymmetric info

Occurs when somebody knows more than
somebody else in the market.
This can make it difficult for 2 people to do
business together
Examples are a mortgage lender does not know
how likely a borrower is to repay their loan in
future years
A used car seller knows more about the quality
of the car being sold than the buyers.

Consumer surplus
The difference between the price that
consumers are willing to pay and the
actual price of the good.

Producer surplus
Represents the difference between the price
suppliers are willing to sell and the actual price of
the good.

Labour 5
the quantity and quality of human resources available in
any economy.
In LEDCS there are large populations but a lack of
skilled workers.
In Germany and Italy there are declining populations so
rely on immigrants to do skilled and unskilled jobs.
The quality of labour is essential for economic progress,
India is of growing importance to the global economy.
The value of a worker is called human capital, increased
by education and training.

Composite demand

When a good is demanded for two or more distinct uses

Joint demand
Where two or more complements are brought together
Joint supply
When two or more goods are produced together, so a change in
supply in one will change the supply of the other.
Complement
A good that is bought with another good to satisfy a want, torch
and batteries
Market clearing price
The price that there is neither excess demand or supply,
everything offered for sale is purchased.
Productivity
Output per unit of input employed

Define: information failure

A lack of information resulting in
consumers and producing making
decisions that do not maximise welfare.

Normal good
A good where demand increases when
income increases
Inferior good
Demand falls when income increases

Competitive markets
The fact that markets are competitive
means that prices fluctuate
If buyers hold back from purchasing a
product or suppliers put more of a product
on the market the price will fall.

Define: disposable income

Income after taxes on income have been deducted and
state benefits have been added
Define: real disposable income
Income after taxes on income have been deducted and
state benefits have been added and the result has been
adjusted to take into account changes in price level.
For example if your salary increases by 5% but prices
rise by 3% then you get an increase of 2%. If rise in
prices is greater than that of income then, real income
falls, the ability to pay for goods and services has fallen.

Define: trade off

A trade off is the sacrifice of one item for
another. E.g. govt might trade off more
hospitals for fewer schools.

Economies of scale
refer to the reduction in long run unit costs that
come when a firm grows in size and produces
on a large scale.
Mass production results in lower long run
average cost.
Internal economies of scale are the lower
average costs an individual firm can gain as it
grows in size.
External economies of scale are the lower
average costs an individual firm can gain from
being in a growing industry.

Define: capacity utilisation

The extent to which firms are using their
capital goods
If they are at full capacity they are likely to
increase investment

Define: Consumer durables

items that provide a flow of services to a
consumer over a period of time.
new cars, household appliances, audiovisual equipment, furniture etc.
The real level of spending on durables has
increased in the last eight years.

Define: GDP
Gross domestic product
The total amount of goods and services
produced in a country, in a given period of
time.

Define: Multiplier effect

The process by which any change in a
component of AD results in a greater final
change in real GDP
Protectionism
The protection of domestic industries from
foreign competition

Example of privatisation
British Rail was privatised in 1994 but the
failure of Railtrack led to the creation of
Network Rail, a not for profit company in
2002. The Labour Government has
continued to privatise or part-privatise
other parts of the UK public sector since it
came to power in 1997.

Define: Costs
The value of inputs
Fixed Costs
Costs that are independent of output
produced

Define: Variable costs

Costs that are directly related to the level
of output produced
Total costs
The total cost of production or provision of
a service

Define: Average cost

The unit cost of production
Marginal cost
The change in the total cost when one
more unity of output is produced
Revenue
Receipts from sales

Define: Price maker

A firm that has control over the market price
Price taker
A firm in a competitive market that has to accept
the market price
Total revenue
Quantity multiplied by price

Define: Average revenue

The total revenue divided by quantity
Marginal revenue
Addition of total revenue from one
additional sale

Define: Short run

Time periods when a firm is unable to
change factors of production except for
one, usually labour
Long run
Time periods when all factor inputs can be
changed

Define: Minimum efficient scale

The lowest level of output where long-run
average cost (LRAC) is minimised
Technical economies
Increased capacity or a technological
development that results in lower long run
average costs

Define: Purchasing economies

Reduced unit costs due to bulk buying of
inputs into a business

Managerial economies
Savings in long-run average costs due to
the specialisation of management
Financial economies
The cost savings that large firms may
receive when borrowing money

Define: Diseconomies of scale

Causes of an increase in long-run average
costs beyond the point of minimum
efficient scale
External economies of scale
Falling long run average costs that benefit
all firms in an industry

Define: Price satisficing

Where a firm makes a reasonable level of
profit that satisfies its stakeholders without
maximising profit
Sales revenue maximisation
An objective where a firm produces where
marginal revenue is zero

Define: profit maximisation

The objective of firms that is achieved
where marginal cost= marginal revenue
Sales maximisation
An objective that involves the
maximisation of the volume of sales

Define: Supernormal profit

Profit that s more than the normal profit
Cross-subsidisation
A business practice where revenue from
profitable activities is used to support lossmaking ones.

Define: Normal profit

The level of profit that keeps a firm in a
particular activity
Market structure
The characteristics of a market
Barrier to entry
Obstacle to new firms entering a market

Define: Concentration ratio

The proportion of the total market share
between the nth largest firms
Allocative efficiency
Where price is equal to marginal cost
Monopoly
A single firm in a market

Define: Productive efficiency

Using the least possible amount of scarce
resources to produce the maximum
amount of output.
Natural monopoly
Where a monopolist has overwhelming
cost advantage

Define: Price discrimination

Where a monopolist charges different
prices for the same product in different
markets
Contestable market
A set of conditions where there is always
the threat of new firms being able to enter
the market

Define: Dynamic efficiency

Where unit costs are lowered over time
Monopolistic competition
A market structure with many firms
producing a differentiated product and
where there are few barriers to entry and
exit

Define: Product differentiation

Where there are minor variations in the
types of products on offer
Deadweight loss
Loss to society of the firm producing
where price exceeds capacity

Define: excess capacity

A consequence of firms producing at
above the minimum point on the average
cost curve
Non-price competitive
Competition between firms on the basis of
for example branding, customer service,
range of products, advertising etc.

Define: Oligopoly
A market dominated by a few large firms
Kinked demand
Indicative of price rigidity in oligopoly
Game theory
A means of modelling the behaviour of
firms

Define: Collusion
Where firms tacitly or otherwise agree to
not compete on prices, service provision
and other matters that might adversely
affect mutual well-being
Interdependent
Where the actions of one firm provoke
counter-action by others

Define: Hit and run entry

The way in which a firm enters a market
where supernormal profits are being
earned and leaves when profits return to
normal
Contestability
The extent to which barriers to entry and
exit in a marker are free and costless

Define: Deregulation
Occurs when the government deliberately
remove official regulations that act as a
barrier to competition in a market.
Supply side policy
Facilitates contestability

Define: Sunk costs:

the costs that cannot be recovered if a firm
ceases operation
Franchise
The outcome of a competitive system to
bid for the provision of services

Define: harmonisation
Establishing common set of rules and
regulations to be followed
The means by which a level playing field is
created in EU transport markets
Liberalisation
(same as deregulation)
The means by which barriers to entry should be
removed to give equal access in all national
markets to transport providers based within the
EU

Define
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