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

2. Transportation and Economics
Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.
Transportation allows the bakery firm to use the most efficient technology in producing bread
A similar example with economies of scope would be if there are economies of scope in producing bread and donuts – i.e. its cheaper to produce bread and donuts together in one firm than to produce them separately – if one town eats only bread and the other town only donuts, low cost transportation may allow a firm to produce both products in one town and ship to the other at a lower cost than producing them separately in the two cities

3. 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

4. Importance of Transportation
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
A citizens like citrus fruit as much as anybody, and substitutes are not readily available – Demand should be strong in A
The opportunity cost of producing oranges in the A area is foregone production of other commodities
Since a lot of wheat could be produced with the resources used for producing oranges, the opportunity cost of producing oranges is high
A high opportunity cost of producing oranges in the Fargo area means that people will only produce oranges if the price is high – i.e. if the price of oranges isn’t high, people will use resources to produce wheat and other products that can more efficiently be produced with Fargo’s resources
That is, supply will be limited – for each price less will be supplied
Remind students about difference between supply and quantity supplied

5. Importance of Transportation
Should A produce oranges or should it get them from B?
Supply P
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
- at prices above 6 EU there is
excess supply
EU 6
Excess demand refers to a situation where the quantity demanded is greater than the quantity supplied
Excess supply refers to a situation where the quantity supplied is greater than the quantity demanded
As long as prices are freely set, a situation of excess supply or excess demand can not exist – the price mechanism will adjust to eliminate any excess demand or supply
Demand
2,000 Q
A Market for Oranges in Isolation

6. Importance of Transportation
Should A produce oranges or should it get them from B? P
Supply
EU 2
The supply of oranges is much higher in B than in A – they can be produced much more cheaply in B
At prices for oranges below 2 YTL in B, there is excess demand – this excess demand increases the further price falls below 2 YTL – graph this
At prices above 2 YTL, there is excess supply – this excess supply increases the further price increases above 2 YTL – graph this
Demand Q
5,000
B Market for Oranges in Isolation P
Excess Supply $2 Q

7. Importance of Transportation
Should A produce oranges or should it get them from B? A B
Amount Traded S S
Excess Supply
For any price above 2YTL, there will be an excess supply of oranges in B
And as price increases, this excess supply increases
For any price below 6YTL, there will be an excess demand for oranges in A
And as price decreases, the excess demand increases
Equilibrium is reached when excess supply and excess demand are equal – after transportation cost is taken out
2,000 pounds of oranges are shipped from B to A, the price of oranges in B is 3.50YTL, the price in A is 4.00YTL, and transportation Cost is .50YTL per pound
There is a gain in societal welfare from this trade
In A, there is resource savings from reducing production from 2,000 pounds to 1,500 pounds – these resources can be put into other productive uses – and there is an increase in available consumption of 1,500 pounds
In B, there is a revenue increase from selling an additional 1,500 pounds of oranges, and there is a gain from reducing consumption on 500 units where the marginal benefit received by those 500 units is less than the revenue received from them (the opportunity cost of consuming them).
EU 6 4
3.5 2 D
Excess Demand D
4,500
6,500
2,000
1,500
3,500

8. Importance of Transportation
2. Transportation Allows Firms to Take Advantage of Scale Economies
Economies of Scale – Average costs decrease with increased production
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
Economies of scale are reductions in average cost resulting from increasing output
Why? Product specific – new production techniques with more volume, learning by doing
Plant specific – larger plants, equipment, machines do not increase in cost proportionately to capacity – also, reserve machine for breakdown – workforce specialization
Multi plant – employ specialized accountants, marketers, specialization among plants
Economies of scope are reductions in average cost resulting from producing multiple outputs – often the result of a shared input

9. Importance of TransportationEU
.50
.30
Average Cost
20,000
40,000 Q

10. Importance of Transportation
If each community produces 20,000 Loaves
Total Costs = 20,000 EU
Production costs = 40,000 (.5) = 20,000 EU
Transportation costs = 0 EU
If C or B produces all 40,000 loaves and ships 20,000 to the other
Total Costs=14,000 EU
Production costs =40,000(.3) = 12,000 EU
Transportation costs = 20,000(.1) = 2,000 EU
Transportation allows the bakery firm to use the most efficient technology in producing bread
A similar example with economies of scope would be if there are economies of scope in producing bread and donuts – i.e. its cheaper to produce bread and donuts together in one firm than to produce them separately – if one town eats only bread and the other town only donuts, low cost transportation may allow a firm to produce both products in one town and ship to the other at a lower cost than producing them separately in the two cities

11. Importance of Transportation
3. Transportation Has an Impact on Land Prices and Land Uses
Example : Milk farmers gain profits by selling milk in the market
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
- Why are land prices determined by the values placed on land for alternative uses? – if land is very valuable for some use, people will bid a high price for that land – e.g. profit opportunity

12. Importance of Transportation
Assume that all land is equally good for producing milk, and that all customers are in the central city
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)
Rent = Yield*(mkt prce/unit – cost/unit) – Yield*transp. cost/unit-mile * distance
- Yield is defined as units per acre

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

14. Importance of Transportation
As you move further from the city center, the value of land goes down
Depending on other economic opportunities, milk producers may be outbid at locations near the city center for land
Rent
Per
Acre
Distance from City Center
The value will go down with distance from the city center in all directions – circles of land value
Land use is also determined by the value of the land for alternative uses – in this example, beef production will occur from the city center out to the intersection of the beef production/milk production lines
Beef Production
Rent
Per
Acre
Milk Production
Distance from city center

15. Importance of Transportation
Transportation expands the size of markets available to firms
Transportation reduces the prices of goods to consumers, and increases the variety of goods available
Transportation provides personal mobility for individuals
Transportation expands the size of markets available to firms – firms can sell products in different parts of the Turkey., and in different parts of the world
Transportation reduces the prices of goods to consumers because they are able to get goods from other locales and because firms are able to compete in broader markets
Transportation provides access to work, church, shopping, social activities, and travel for individuals
Transportation accounts for a large portion of Turkey. GDP, employs a lot of workers, accounts for a significant portion of final product costs

16. 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