Revision notes

Task: What is the importance of transport to the economy?

Transport systems help overcome the effects of distance and:

1. Increase the size of the market by enabling domestic goods to be sold globally;

2. Create mass markets

3. Enhance opportunities for international trade / economic integration

4. Enables just in time production techniques

5. Improved mobility of labour (commuting possible)

6. Improved UK competitiveness (minimises travel times / unit costs)

Task: Why is transport infrastructure important?

1. Transport accounts for nearly 15% of UK economic activity in terms of GDP.

2. Transport infrastructure generates positive externalities

3. Investment in transport infrastructure can be an initial stimulus to regional economic development.

Task: What factors affect the demand for transport?

The quantity of transport demanded is dependent on a range of factors:

1. The price of a journey e.g. price of petrol or rail fare

2. Price of substitutes e.g. coach or rail fare.

3. Price of complements e.g. price of new cars and petrol.

4. Income e.g. low income households cannot afford a car.

5. Consumer taste e.g. public transport unreliable.

6. Time – how long will a journey by a given transport mode take?

Task: Why has the demand for road transport risen sharply?

Consumer behaviour changes have increased demand for car travel:

1. Workers commute longer distances.

2. Out of town shopping centres encourage road usage.

3. More pupils are taken by car in the school run.

4. The price of new cars has fallen following government fair trade investigation stimulating demand.

Task: What is Price discrimination?

This is where a firm sells identical products at different prices to different buyers.

Task: State the major stakeholders in a transport market and explain their objectives to the person next to you.

· Passengers or freight users: wants low price/costs and reliable safe journeys.

· Employees: seeking high wages and good working conditions.

· Employers: (operators) want minimum costs, maximum profits and meeting government targets.

· Managers: seeking bonuses and promotion.

· Owners/shareholders: maximum profits, dividends and growth.

· Local communities: want excellent transport infrastructure and minimal negative externalities.

· Government: want to satisfy voters, invest in infrastructure and high tax receipts.

Task: How is economic efficiency achieved?

• Productive efficiency – firms delivering the highest possible output from given inputs by producing at the lowest unit costs.
• Allocative efficiency – resources are allocated to the production of goods/services most valued by society.

Task: How can competition lead to an efficient allocation of resources?

In terms of:

1. Productive efficiency:

· Unit costs leading to higher profits;

· Firms who do not produce at unit cost may be forced to close.

2. Allocative efficiency:

• Produce goods/services most people want
• Enter industries enjoying abnormal profits
• Leave industries suffering abnormal losses

Task: Explain how firms compete on non-price competition

Non-price competition in the form of differentiation through:

• Quality
• Brand Image
• Advertising
• Distribution

Task: Do natural monopolies earn abnormal profits?

Unregulated monopolies have the freedom to set profit maximising (or loss minimising) price/output.

Regulator may prevent abnormal profits through:

• Cap price increase
• Monitor service quality
• Introduce competition

Task: What are the benefits created by monopolies?

• Significant economies of scale
• A natural monopoly e.g. railway network MES is so high meaning one firm can fully exploit the potential of economies of scale.
• Only monopolies can generate sufficient profits to enable large scale high cost of R&D.

Task: How do firms gain and maintain monopoly power?

The degree of monopoly power is related to the availability of close substitutes through:

• Unique or highly differentiated products

Internal organic growth or mergers/takeovers

DEREGULATION

Task: Describe the importance of deregulation in the transport industry?

Government encourage competition through:

• Privatisation e.g. telecommunication; water; electricity etc.
• Removal of barriers to entry and open up a market to greater competition.

Task: Analysis the benefits and costs of deregulation in road passenger (bus) in the UK.

Benefits:

• More entrants (new firms)
• More frequent services
• Lower fares

Costs

• More buses operating below full capacity.
• Adding to existing congestion.
• Increasing pollution in crowded city centres.

Task: Analysis the benefits and costs of UK railways privatisation.

Benefits:

• Improved services
• More competitive charges
• Better customer services
• Enhanced efficiency

Cost:

• Safety
• Punctuality
• Profitability