Transport Economics

1179 Words Oct 10th, 2013 5 Pages
TRANSPORT ECONOMICS – Costs and Revenues

In economics it is important to understand the costs and revenues of firms. This will give an important insight into the behaviour of firms. Basic / traditional economic considers that the sole purpose of firms is to maximise profits. This goal then leads firms to minimise costs and maximise profits.

Transport firms are no different. In the UK we have many types of firms

* Rail * Network Rail is responsible for rail infrastructure * Train operators responsible for ultimate service to customers (owners of franchises) * ROSCO – owners of rolling stock who lease these to the operators * Infrastructure and maintenance and renewal companies * Channel
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Price per unit
(average revenue) | Quantity Demanded
(Qd) | Total Revenue
(TR) | Marginal Revenue
(MR) | £s | units | £s | £s | 400 | 220 | 88000 | | 370 | 340 | 125800 | 315 | 340 | 460 | 156400 | 255 | 310 | 580 | 179800 | 195 | 280 | 700 | 196000 | 135 | 250 | 820 | 205000 | 75 | 220 | 940 | 206800 | 15 | 190 | 1060 | 201400 | -45 |
Average and marginal revenue – the important relationshipsIn our example in the table above, as price per unit falls, demand expands and so too does total revenue, although because the demand curve is downward sloping, the average revenue falls as more units are sold. This causes marginal revenue to decline. Eventually once marginal revenue becomes negative, a further fall in price (e.g. from £220 to £190) causes total revenue to fall.Because the price per unit is declining, total revenue is rising at a decreasing rate and will eventually reach a maximum (see the next paragraph).Elasticity of demand and total revenueWhen a firm faces a perfectly elastic demand curve, then average revenue = marginal revenue (i.e. extra units of output can all be sold at the ruling market price). However, most businesses face a downward sloping demand curve! And because the price per unit must be cut to sell extra units, therefore MR lies below AR. In fact he MR
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