Economics of Transportation

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 Introduction

Transport Economics is the study of the

movement of people and goods over space and
time. It is a branch of economics that deals with
the allocation of resources within the transport
sector. Historically, it has been thought of as the
intersection of microeconomics and civil
engineering, as shown on the right.
 Significance Of Transportation

1.Transport contributes in Growth of industries whose product requires quick

marketing.

2.Transport helps in increase in the demand for goods.

3.Transport creates place utility. Geographical and climatic factors force industries
to be located in particular places far away from the markets and places where there
may not be any demand for the products. Transport bridges the gap between
production and consumption centers.
4.Transport creates time utility. Of late transport has started creating the time utility
also. It has been made possible by virtue of the improvements in the speed of
transport. It helps the product to be distributed in the minimum possible time.
5.Transport helps in stabilization of price. Transport exerts considerable
influence upon the stabilization of the prices of several commodities by moving
commodities from surplus to deficit areas. This equalizes the supply and
demand factors and makes the price of commodities stable as well as equal.

6.Transport ensures even flow of commodities into the hands of the consumers
through out the period of consumption.

7.Transport enables the consumers to enjoy the benefits of goods not produced
locally. This increases the standard of living, an essential factor for further
development of marketing and economy.

8.Transport identifies competition, which in turn, reduces price. Prices are also
reduced because of the facilities offered by transport for large-scale production.
Advantages of large- scale production is possible only due to transport.

9.Transport increases mobility of labor and capital. It makes people of one place
migrate to other places in search of jobs. Even capital, machineries and equipments
are imported from foreign countries through transport alone.
10.Bring countries closer : No country in the world is self-sufficient. They have to
depend on one another to fulfill their requirements. Transportation has brought the
countries closer. It not only caters to the need of mobility but also provides
comfortable and convenience.
11. Creates employment: Transport also contributes to economic development
through job creation. It creates both direct and indirect employment opportunities. In
Pakistan, a sizeable portion of the country’s working population is directly or
indirectly employed in the transport sector.

It also facilitates movement of labors and thereby encourages employment resulting

into industrial development and thereby economic development.

12. Serve several purposes:

Transportation provides access to natural resources and promotes trade, allowing a
nation to accumulate wealth and power. Transportation also allows the movement of
soldiers, equipment, and supplies during war.
Hence transportation is vital to a nation’s economy as it serve several purposes. It
includes the manufacture and distribution of vehicles, the production and distribution
of fuel, and the provision of transportation services
Transportation Functionality

Product Movement
Functions of
Transportation
Product Storage
Product Movement
 Temporal:
-Product is locked up during transit, hence inaccessible
-Positive amount of time is spent in transporting material
-Time is a resource[Temporal Resource] expended in Transportation
-During the time product is locked up costs are incurred in proportion of time
 Financial:
-Administration costs, Salaries, Maintenance costs are expended
 Environmental:
Fuel costs are high
Creates air pollution, congestion, noise pollution
 Product storage

When unloading and loading is more expensive then storage

.
When storage space is limited[situation when inventory levels are high
Principles of Transportation

Economy of
Scale
Principles of
Transportation
Economy of
Distance
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Types of Transportation
 Rail Transport:

Advantages of Rail transport:

 It is a convenient mode of transport for travelling long distances.
 It is relatively faster than road transport.
 It is suitable for carrying heavy goods in large quantities over
long distances.
 Its operation is less affected by adverse weathers conditions like rain, floods, fog, etc.
Limitations of Railway transport:
 It is relatively expensive for carrying goods and passengers over short distances.
 It is not available in remote parts of the country.
 It provides service according to fixed time schedule and is not flexible for loading or
unloading of goods at any place.
 It involves heavy losses of life as well as goods in case of accident.
 Road Transport
 Advantages
 It is a relatively cheaper mode of transport as compared to other modes.
 Perishable goods can be transported at a faster speed by road
carriers over a short distance.
 It is a flexible mode of transport as loading and unloading is possible at any
destination. It provides door-to-door service.
 It helps people to travel and carry goods from one place to another, in places which
are not connected by other means of transport like hilly areas.
 Limitations of Road transport
 Due to limited carrying capacity road transport is not economical for
long distance transportation of goods.
 Transportation of heavy goods or goods in bulk by road involves high cost.
 WaterTransport
 Advantages:
 It is a relatively economical mode of transport for bulky and heavy goods.
 It is a safe mode of transport with respect to occurrence of accidents.
 The cost of maintaining and constructing routes is very low most of them are
naturally made.
 It promotes international trade.

 Disadvantages:
 The depth and navigability of rivers and canals vary and thus, affect operations of
different transport vessels.
 It is a slow moving mode of transport and therefore not suitable for transport of
perishable goods.
 It is adversely affected by weather conditions.
 Sea transport requires large investment on ships and their maintenance.
Air Transport:
 Advantages:
 It is the fastest mode of transport.
 It is very useful in transporting goods and passengers to the area, which are not
accessible by any other means.
 It is the most convenient mode of transport during natural
calamities.
 It provides vital support to the national security and defence
 Disadvantages:
 It is relatively more expensive mode of transport.
 It is not suitable for transporting heavy and bulky goods.
 It is affected by adverse weather conditions.
 It is not suitable for short distance travel.
 In case of accidents, it results in heavy losses of goods, property and
life.
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 What are Current Transportation Problems?

1. Financing
2. Congestion
3. infrastructure
4. Safety
5. population
6. Increased truck weights
The Economic Importance of Transportation
• The transportation sector moves goods and people, employs millions
of workers, generates revenue, and consumes materials and services
produced by other sectors of the economy.

• Good transport network is crucial for sustained economic growth and

development of a nation. This vital infrastructure is regarded as an
important determinant for the success of a nation’s effort in
diversifying its production base, expanding trade and linking together
resources and markets into an integrated economy
At the macroeconomic level (the importance of transportation for a whole economy),
transportation and the mobility it confers are linked to a level of output , employment
and income within a national economy. In many developed countries, transportation
accounts between 6% and 12% GDP.

At the microeconomic level (the importance of transportation for specific parts of the
economy) transportation is linked to producer, consumer and production costs . The
importance of specific transport activities and infrastructure can thus be assessed for
each sector of the economy.

Transportation accounts on average between 10% and 15% of household expenditures

while it accounts around 4% of the costs of each unit of output in manufacturing.
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IMPORTANCE OF TRANSPORT IN
ECONOMIC DEVELOPMENT
• Role in Production: It enables the entrepreneur to assemble more easily the
raw material and labour input needed to make a specific product.

• Employment Opportunities: Transport also contributes to economic

development through job creation.

• Geographical Specialization: The development of transportation system has

enabled regions to specialize in producing its most efficient output. Production
and consumption of products can take place in two different locations.
• The bulk of the electronic products we use daily, such as television sets, is
manufactured in the east and transported through ship to Africa.
• Substantial economies of scale have been achieved and these have resulted in
reduced per unit production costs.
 Contd..
• Trade: Transportation has enabled countries to trade with other countries
throughout the world. International transportation has led the way to more
world trade, and it has enabled nations or regions to specialise in producing
whatever it can do best (comparative advantage)
• Tourism: The airline industry has specifically contributed to the growth in the
tourism industry, due to airline being fast, safe and relatively cheap. The car rental
industry, likewise has also played a major role in tourism development. Currently
tourism industry is the fastest growing industry in Namibia.
• Others:
• Time Utility; Efficient transportation creates time utility by ensuring that
products are at the proper locations when needed
• Place Utility ; The reduction in transportation cost between points A and B gives
a commodity a place utility. This place utility will encourage market areas to
purchase products from distant suppliers that might be locally produced
• Quantity Utility; Transportation gives goods a quantity utility through the
assurance that the goods will arrive without damage. This helps assure that
the quantity demanded is the same as quantity delivered
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TRANSPORTATION MANAGEMENT
Transportation Economics and Pricing
 Transportation Economics Factors
 Cost structures
Transportation Economics…

• Distance

Distance is a major influence on transportation cost since it directly contributes

to variable expense, such as labor, fuel, and maintenance.
• Weight
scale economies exist for most transportation movements.
• Density
refers to the ratio between the weight of
a good and the volume of a container
that it consumes for transport.

It is more common than not that a

container will cube out more often then
it will weight out.
• Stowability
refers to how goods being shipped fit into the dimensions of the container that is
used to ship the product across the various transportation modes.

Factors Effecting Stowability

√ Package Size
√ Package Shape
√ Odd-Shaped Items
√ Ability to be Nested
√ Excessive Size/Length of Shipped Items
• Handling

Special handling equipment may be required to

load and unload trucks, railcars, or ships. The
manner in which products are physically grouped
together in boxes or on pallets for transport and
storage will impact handling cost.
• Liability

Carriers must either have insurance to

protect against potential damage or
accept financial responsibility. Shippers
can reduce their risk, and ultimately
transportation cost, by improved
packaging or reducing susceptibility to
loss or damage.
• Market
A transport lane refers to movements between origin and destination
points. Since transportation vehicles and drivers typically return to their
origin, either they must find a back- haul load or the vehicle is returned or
deadheaded empty.
Transportation Costing...
• Variable Cost
… the variable category includes direct carrier cost associated with movement of each
load.
• Fixed Cost
… the fixed category includes costs not directly influenced by shipment volume.
• Joint
… expenses created by the decision to provide a particular service
• Common
… this category includes carrier costs that are incurred on behalf of all or selected shippers.