Lecture-2
Microeconomics Basics

Same supply and demand principles…
◦ … well, almost!

Choices between non-similar goods
◦ Mode choice

Network effects
◦ Transportation network is composed of entities
 Complementary  Subway and AirTrain
 Substitute  Air vs. HSR (for certain distances)

Else?
◦ Externalities

What about the Equilibrium Price?
◦ Transportation costs


Fixed (infrastructure) costs: Do not vary with
output
Variable (operating) costs: Vary based on the
level of output
Modes
Fixed / Capital Costs
Operating Costs
Land, Construction,
Rail or highway
Maintenance, Labor, Fuel
Rolling Stock
Pipeline
Land, Construction
Maintenance, Energy
Land, Field & Terminal
Air
Maintenance, Fuel, Labor
Construction, Aircraft
Land for Port Terminals,
Maritime
Cargo Handling
Maintenance, Labor, Fuel
Equipment, Ships
Source: The Geography of
Transport Systems

Other costs (social, environmental etc.)
Estimated Highway External Crash Costs (Cents Per Vehicle Mile) (FHWA)
Rural Highways
All Highways
High
Med.
9.68
3.15
1.76
4.03
1.28 0.78
6.02
1.94 1.13
Pickup & Van
10.21
3.31
1.75
4.05
1.27 0.74
6.70
2.15 1.17
Buses
14.15
4.40
2.36
6.25
1.89 1.08
9.55
2.94 1.62
5.97
2.00
0.97
2.21
0.71 0.40
3.90
1.29 0.65
6.90
2.20
1.02
3.67
1.16 0.56
5.65
1.79 0.84
9.52
3.09
1.68
3.98
1.26 0.76
6.12
1.97 1.11
Automobile
Single Unit
Trucks
Combination
Trucks
All Vehicles
Low
Urban
Highways
High Med.
Low
High
Source: TDM Encyclopedia
Med.
Low





In general: percentage change of one variable
vs. percentage change in another variable
Price elasticity of Demand: Change in demand
quantity vs. change in price  for single
commodity
Income Elasticity of Demand???
Price elasticity of Supply: change of supplied
quantity vs. change in price
Cross-price elasticity of demand: change of
demand quantity of a good vs. price change
of another good




Substitutes?  Pepsi and Coke
Necessity or luxury?  Bread vs. Ipad
The market  Food vs. electronics
Time Horizon  Sudden increase in oil price vs.
demand




Elasticity = E =
E=0 ?
E=-1 ?
E=-∞ ?
%
change in demand
% change in price


The amount paid by buyers and received by
sellers.
Total Revenue=P × Q, the price of the good
times the quantity of the good sold
◦ When demand is inelastic (a price elasticity less than 1),
price and total revenue move in the same direction.
◦ When demand is elastic (a price elasticity greater than 1),
price and total revenue move in opposite directions.
◦ If demand is unit elastic (a price elasticity exactly equal
to 1), total revenue remains constant when the price
changes.
Source: Mankiw, 2007
Source: Wikipedia





Total cost  f(Quantity)
Average cost  Total cost/Quantity
Average fixed cost ??
Average variable cost ??
Marginal Cost  Change in total cost per
additional unit production  𝑀𝐶 =
∆𝑇𝐶
∆𝑄