1 Transport, Transport Trends and the Economy (10%)
1.1.1 What is transport
economics?
Transport refers to the movement of people and goods between destinations. Transport economics studies the allocation of resources
used to move passengers and freight from place to place.
1.1.2 Transport modes?
A transport mode is a method of moving passengers or freight. The main transport modes are road, rail, sea, air and pipelines
1.1.3 How is transport
usage measured?
Passenger transport is the movement of people from one place to another and is measured in billion passenger kilometres.
Freight transport is the movement of raw materials, components and finished products and is measured in billion tonne kilometres
1.1.4 What is the
importance of transport
to the economy?
Transport systems increase the potential size of the market by enabling domestic goods to be sold globally. Workers become more
mobile and can live many miles from work and commute. Hence transports create mass markets based on extensive use of
specialisation. Large scale production and associated economies of scale lower unit costs and enhance opportunities for
international trade and the benefits or economic integration based on comparative advantage
1.1.5 Why is freight
transport important?
Modern transport systems enable Just in Time (JIT) production techniques. Components are delivered when needed reducing a firm’s
stock levels hence unit costs Just in time delivery substantially reduces working capital tied up in stocks.
Firms rely on their suppliers’ ability to meet their needs when required.
On average, in the UK, we
make nearly 3 trips per
day, travelling for 60
minutes per day and
covering 10.7 kilometres.
This means that we spend
some 4% of our lives
travelling. CfIT
1.1.6 What is
infrastructure?
Infrastructure is the stock of capital used to support the economic system. An economy needs an underlying stock of capital items
(infrastructure) to enable economic activity eg telecommunications eg cables and satellites to enable web access
Infrastructure enables
growth
1.1.7 Transport
infrastructure is?
A country’s transport infrastructure is made up of past investment in the roads & rail networks, airports & docks, etc that enable the
movement of goods and people.
1.1.8 Types of transport
infrastructure
There are two aspect of transport infrastructure items needed to move freight and people over a distance:
• Transport networks categorised by mode eg the rail network is made up of train track, tunnels and signalling systems
• Transport nodes or terminals where journeys begin or end eg airports, docks and railway station
Efficient transport
systems minimise travel
times and so lower
domestic unit costs and
so improve UK
competitiveness.
1.1.9 Why is transport
infrastructure important?
The transport infrastructure generates positive externalities. Investment in local transport infrastructure can be an initial stimulus to
regional economic development and generate a multiplier effect. For example roads open up market and employment opportunities, to
the benefit of third parties such as local businesses and workers. Infrastructure changes affect the cost of travel and so influence travel
patterns and traffic volumes; patterns of land use the operation of labour markets and the location and organisation of business.
Transport accounts for
around 15% of UK
economic activity in
terms of GDP.
1.1.10 Explain transport
operations
Transport operations are decisions about transport mode types to use or provide. Demand side decisions by consumers and firms
concern what journey to make, by what mode, and at what time. Supply side involves firms deciding what transport services to offer.
1.1.11 The role of the
public sector in transport
operations?
The privatisation of nationalised bus & rail operators means most supply side operational decisions are increasingly taken by profit
maximising private sector bus companies and train operators. Government still plays an indirect role by appointing regulators, such as
Office of the Rail Regulator (ORR), to monitor private sector transport operators Train Operating like Virgin Rail.
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1.1.12 What is the
Department for Transport
The Department for Transport (DfT) determines overall transport strategy and manage relationships with the agencies such as the
Highways Agency responsible for the delivery of that vision.
http://www.dft.gov.uk
1.1.13 How do
economists judge the
performance of transport
operators?
Evaluation of performance requires the identification and monitoring of indicators. Potential performance indicators include
• Fares & profits. An increase in fares and abnormal profits are indicators of poor performance
• Subsidies: ie the amount a public service obligation to operators to subsidise essential loss making services
• Performance: eg loading, number of commuters, punctuality of services, number of complaints
• Quality of service: eg degree of overcrowding; the number of services, service frequency
• Safety: eg numbers of accidents per billion passenger kilometres
The government pays a
public service obligation
to TOCs and bus operators
to subsidise essential loss
making services.
1.1.14 What are the main
characteristics of
transport?
The demand for transport is derived (got) from the demand for what travelling makes possible eg commuting. Transport is a
• service consumed immediately and cannot be stored
• usually an intermediate output ie a stage in the process of creating products
• has a distance and a time dimension. All trips are made over a particular distance; between start and end destinations; and
for a given duration of time; at different times of the day (peak and off peak); at different seasons eg summer or winter
Transport generates externalities causing market failure because the price of transport does not always reflect the full social cost to
society. Eg airlines generate significant negative externalities such as noise, pollution and congestion.
1.1.15 What are the
advantages and
disadvantages of a given
mode or transport?
To assess the advantages and disadvantages of a given mode or transport, consider relative:
• Characteristics including distance, nature of item and urgency of the journey, balance between fixed and variable costs
• Externalities generated by a given mode
• Equity issues eg high cost of car ownership and high price of rail excludes low income groups
1.1.16 How does
transport contribute to
social exclusion?
Poor transport contributes to social exclusion in two ways. First, it restricts access to activities that enhance people's life chances, such
as work, learning, health care, food shopping, and other key activities. Second, deprived communities suffer disproportionately from
pedestrian deaths, pollution and the isolation which can result from living near busy roads.
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27% of households and
60% of disabled people
have no car
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1.2 Demand for Transport
1.2.1 What is the demand
for transport?
The demand for transport refers to the amount of journeys undertaken at various prices, in a given time period. Transport demand
• Can be by passengers travelling between A and B or firms moving freight.
• Is a derived demand ie got from the demand for what travelling makes possible
1.2.2 What factors affect
the demand for
transport?
The quantity of transport demanded is dependent on a range of factors:
• The price of a journey eg price of petrol, or rail fare
• Price of substitutes eg coach or rail fare from Oxford to London
• Price of complements eg price of new cars and petrol
• Income eg low income households cannot afford a car and rely more on public transport such as buses
• Consumer taste eg is public transport uncomfortable and unreliable?
• Time how long will a journey by a given transport mode take?
For example the demand for international air transport is affected by UK GDP, world GDP, airfares, and exchange rates.
Transport is not usually consumed for its own sake. The demand for transport is derived (got) from the demand for what travelling makes
possible eg commuting to work shopping trips, holiday visits; firms moving final goods and components between locations.
1.2.4 Illustrate off peak
and peak time demand
Peak time refers to hours immediately before the start and after
the end of work hours when most workers commute ie rush hours
and is when the demand for transport is at its highest. Peaking and
congestion result
Note that the peak time demand curve is further to the right and
more prince inelastic than off peak. Peak and off peak travel are
weak substitutes. Where consumers have to be at work by 09 00,
off peak travel is not a substitute good. Their cross elasticity of
demand coefficient is low & positive,
Price £s
1.2.3 Explain derived
demand
Many haulage journeys
could take place in off
peak periods.
School runs contribute
to rush hour peaking.
Off Peak Demand
Peak Demand
Journeys
1.2.5 What is peaking?
Peaking occurs when demand exceeds supply on a given network at a given time causing congestion eg rush hours & bank holidays
1.2.6 Congestion is?
Congestion is when demand exceeds supply on a given network at a given period in time eg bank holiday on holiday routes
1.2.7 What is loading?
Loading: the percentage of capacity utilised in a journey. Eg a loading factor of 80% means 20% of seats or space is unused in a journey
Tutor2u Transport Economics Q&A 2006 Edition
Understanding ceteris
paribus (cet par) is the
key to understanding
microeconomics.
Many factors affect
transport demand.
Economists assume all
factors are held
constant ie do not
change except one –
price.
A change in a factor
being held constant
invalidates the cet par
assumption.
© Richard Young
Also called load factor
Page 10
1.2.8 Why has the
demand for road
transport risen
particularly sharply?
1.2.9 Why have petrol
prices increased
displayed volatility?
Consumer behaviour changes have increased demand for car travel:
• Workers commute longer distances;
• Out of town shopping centres encourage road usage;
• More pupils taken by car in the school run;
• The price of new cars has fallen following government fair trade investigations stimulating demand.
•
•
A cartel, OPEC, largely control the supply of oil for refinement into petrol. Changes in supply shift the supply curve along a highly
price inelastic demand curve resulting in significant price fluctuations.
The demand for oil and petrol linked to world trade cycle
The real cost of
motoring has fallen
Petrol prices are
volatile for two main
reasons:
1.3 Elasticity & Transport
1.3.1 What is the
difference between
qualitative & quantitative
analysis
Qualitative analysis uses words to predict the effect of a change eg:
• A fall in price results in an increase in quantity demanded
• A proposed new bypass is likely to have a large negative impact on the environment
Quantitative analysis places a number value on a given change eg:
• A 10% fall in price results in a 5% increase in quantity demanded
• The negative impact on the environment of a proposed new bypass is estimated at £20m
Transport economics is
a context in which to
apply at AS
Microeconomic
concepts
1.3.2 What is the concept
of elasticity
Elasticity measures sensitivity or responsiveness specifically how one variable responds to a change in a second variable.
• Inelastic means unresponsive, ie a change in one variable results in a smaller change in a second
• Elastic means responsive, ie a change in one variable results in a bigger change in a second
1.3.3 Why is elasticity an
important concept?
Elasticity is a key quantitative tool in microeconomics that is used extensively to assess and predict the effect of a change in one variable
eg price, on a second variable eg quantity demanded. In short, elasticity quantifies changes.
The number one
determinant of PED for
transport is the
availability of
substitutes
1.3.4 How are percentage
changes in a variable
calculated
The ability to calculate elasticity values requires the ability to calculate the change in a variable in percentage terms.
1.3.5 What are the main
types of elasticity?
Price elasticity of demand the responsiveness of demand to a given change in price
To calculate a percentage change (%∆)in a variable X use the equation :
%∆X = (new X – old X) / old X x 100 where X is the variable such as price or quantity demanded.
Students can have
problems estimating
percentage changes.
Practice!
Income elasticity of demand measures the responsiveness of demand to a given change in income
Price elasticity of supply measures the responsiveness of supply to a given change in price
Cross elasticity of demand measures the responsiveness of demand for good A to a given change in price of good B
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1.3.6 How can transport
operators make use of
PED?
Firms can use price elasticity of demand (PED) estimates in transport to predict:
• The effect of a change in fares on quantity demanded
• The effect of a change in fares on total revenue & expenditure
• The effect of a change in indirect tax eg road charging or fuel duty on price and quantity demanded
• The effects of price discrimination in peak/off peak. Price discrimination is where a monopolist charges different prices for the
same product to different segments of the market eg peak and off peak rail travel
1.3.7 How can transport
operators make use of
YED?
Firms and government use income elasticity of demand (YED) estimates to predict impact on demand and revenues of:
• Economic growth – the demand for luxury items such as air travel (high positive YED) increases more than products with a low
YED such as bus travel
• The business cycle ie boom & recession – the fluctuations in the demand for rail air buses etc can be estimated
1.3.8 How can firms make
use of XED?
Cross elasticity of demand (XED) estimates predict the impact of a rival’s pricing strategies on demand for their own products. If a
competitor cuts price, firms use XED to predict the effect on the quantity demanded and total revenue of their own product.
1.3.9 Analyse the impact
of elasticity on transport
on each mode of
transport
Table: Car Elasticities
Variable
With respect to
Short run
Long run
Petrol
consumption
Petrol price
-0.3
-0.6 to –0.8
Car traffic
Petrol price
-0.15
-0.3
Petrol
consumption
Income
0.35 to 0.55
1.1 to 1.3
Car traffic
Income
The elasticity value will vary depending on whether travel is
at peak or off peak and the availability of substitutes
• Road rail and air travel have high positive income
elasticity of demand (YED).
• Economic growth is resulting in a proportionately
greater increase in the use of these modes of
transport
Note in the Car
Elasticities Table that:
Elasticities are an
estimate
The estimates are
within a range
1.1 to 1.8
Source: Glaister and Graham (2000)
1.3.10 Elasticities for
transport modes are?
Buses exhibit low, even negative YED, and are mainly used by low income consumers. Road and public transport are weak substitutes for
commuters. Indicator: low, positive, cross elasticity value
1.3.11 How do economic
growth rates influence
demand for transport?
Economic growth raises incomes. Given the high positive YED for cars, a given economic growth rate results in a proportionately larger
increase in car usage. Note increased car usage is:
• A result of increased prosperity and the preferences of consumers
• Unsustainable because of resultant congestion and environmental impacts from pollution
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1.4 Recent Trends in Transport Usage
See http://www.dft.gov.uk/stellent/groups/dft_transstats/documents/divisionhomepage/610986.hcsp for 2005 figures and commentary
1.4.1 Outline recent
passenger transport
usage trends
Passenger travel by mode: car and other modes
billion passenger kilometres
Car van
or taxi
Bus &
coach
Motor
cycle
Bicycle
All
Road
Rail
Air
Total
1960
139
79
11
12
241
40
0.8
282
1970
297
60
4
4
365
36
2
403
1980
388
52
8
5
453
35
3
491
1990
588
46
6
5
645
40
5.2
690
2000
639
47
5
4
695
47
7.6
750
2004
679
48
6
4
736
51
9.8
797
Data & commentary source: Source Dept for Transport Trends 2005
1.4.2 Comment on
distance travelled and
GDP
Traffic Passenger & GDP
190
180
Index (1980=100)
170
160
Vehicle
150
Passenger
140
GDP
130
120
Total traffic increased by 81 per cent between 1980 and
2004, from 277 to 502 billion vehicle kilometres. Most of
this growth occurred between 1980 and 1990; since
1990 traffic has increased by 21 per cent.
• Car traffic has risen by 85 per cent since 1980,
from 215 to 398 billion vehicle kilometres Light
van traffic has more than doubled since 1980,
from 26 to 61 billion vehicle kilometres.
• The distance travelled by heavy goods vehicles
has also increased from 20 to 29 billion vehicle
kilometres, a rise of 49 per cent since 1980.
• Bus and coach traffic also increased by 49 per
cent, from 3.5 to 5.2 billion vehicle kilometres.
• Pedal cycle traffic fell by nearly 40 per cent
between 1984 and 1993. It rose between 2000
and 2003 but fell sharply in 2004.
Car use has continued
to increase as
disposable income
has risen, with little
change in the real
cost of motoring and
rising real costs of
public transport
fares. While the
average time people
spend travelling has
hardly changed, at
around one hour per
day, increased car use
has allowed them to
travel further in the
same time.
Between 1980 and 1992, traffic (measured in vehicle
kilometres) and overall travel (measured in passenger
kilometres) grew at a faster rate than GDP. Since 1992
GDP has increased by 42 per cent compared with rises in
road traffic and overall travel of 21 per cent and 16 per
cent respectively.
Since 1992 there had been some uncoupling of traffic
and travel growth from economic growth.
Commentary & Data Source Department for Transport
Trend 1.2a : Traffic, passenger kilometres and GDP
110
100
1975
1980
1985
1990
1995
2000
2005
2010
Year
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1.4.3 Has the real cost of
travelling changed in the
last 20 years?
Trend 2.6: Changes in the real cost of transport & in income: 1980 to 2004
index 1980
= 100
Disposable
income
Rail
fares
Bus &
coach fares
Petrol/oil
All
motoring
1980
100
100
100
100
100
1990
134
112
106
83
88
2000
176
134
128
120
97
2001
184
137
131
112
95
2002
187
137
133
106
93
2003
192
136
134
107
91
2004
196
137
137
110
90
The growth in car travel and the fall in bus patronage
since 1980 have been accompanied by a slight reduction
in motoring costs and rising bus fares in real terms.
The overall cost of motoring (including purchase,
maintenance, petrol and oil, and tax and insurance) has
remained at or below its 1980 level in real terms,
although the real cost of fuel is now 10 per cent higher
than in 1980, despite falling by 8 per cent since 2000.
In contrast to overall motoring costs, public transport
fares have risen in real terms since 1980. In 2004, both
bus and coach fares and rail fares were 37 per cent
higher than in 1980.
Over the same period, average disposable income has
gone up more than 95 per cent in real terms.
Transport by any mode
has therefore become
more affordable, with
a greater
improvement in the
affordability of car use
than that of public
transport.
The CfIT predicts the
cost of car ownership
is set to fall by 20%
and public fares rise
by 20% over the next
10 years
Source Dept for Transport Trends 2005
1.4.4 Outline recent
passenger transport
usage trends
Trend 5.1: Freight transport by mode: goods moved
billion tonne kilometres
Road
Rail
Water
Pipeline
Total
1980
93
18
54
10
175
1985
103
15
58
11
187
1990
136
16
56
11
219
1995
150
13
53
11
227
2000
158
18
67
11
254
2004
160
21
59
11
251
Tonne kilometres moved (defined as tonnes carried
multiplied by kilometres travelled) has increased by 44
per cent since 1980.
Freight moved increased overall by 44 per cent between
1980 and 2004, from 175 to 250 billion
tonne kilometres.
The majority of the increase is due to goods moved by
road, which has increased by 72 per cent since 1980,
from 93 to 160 billion tonne kilometres, although it has
stabilised since 1997. Road freight now accounts for 64
per cent of all goods moved, compared with 53 per cent
in 1980.
Goods moved by rail declined slightly in the mid-1990s, but has since risen to reach 21 billion tonne kilometres. Between 1995 and 2004
goods moved by rail increased by 56 per cent; it now accounts for 8 per cent of all goods moved, compared with 10 per cent in 1980.
Goods moved by water has increased gradually, from 54 billion tonne kilometres in 1980 to 59 billion tonne kilometres in 2004. However, as
more freight is moved by road, water’s share has reduced, from 31 to 24 per cent over the same period.
Goods moved by pipeline has remained fairly stable over the last twenty years, at around 11 billion tonne kilometres.
Source Dept for Transport Trends 2005
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1.5 UK transport trends by mode
1.5.1 Describe key current
UK transport trends for
each main transport mode
Sustained economic growth means higher car ownership and more goods and workers are being transported. Sustained under investment
in infrastructure over 20 years means air rail and road networks are operating beyond capacity, in peak times, at current levels of
demand. The duration of peak time periods is increasing. Projected increases in demand for car transport are unsustainable.
1.5.2 What are the current
UK transport trends for road
transport?
Road is the dominant mode for all journeys of more than one mile and its share of journeys of all lengths is increasing
• Used predominately by high income groups
• The UK has less road capacity per car apart from Germany and higher average daily vehicle flows.
• Three in ten homes in Britain don't have a car (13 million people)
• CfIT forecast road congestion is set to grow by 65% by 2010. Motorway congestion is set to increase by 268% by 2010. Doubling
the number travelling by public transport is equivalent to just 5 years projected growth in car traffic.
• Traffic on many roads, especially in rural areas, is set to double by 2025.
1.5.3 Current UK trends for
buses?
Buses are used predominately by low income groups eg pensioners Buses are perceived as a poor substitute and exhibit a low even
negative YED. Billion passenger kilometres is rising only slowly if not falling. Bus fares risen in real terms
1.5.4 What are the current
UK transport trends for
railways?
Rail is used predominately by high-income passengers. Bulk goods like coal use rail freight.
• There has been decades of under-investment in infrastructure and rolling stock for decades.
• After the Hatfield disaster, rail usage is rising. Since privatisation, rail passenger figures have risen 30 per cent and the network
is operating beyond capacity. Up to £52 billion of investment may be required to meet increased demand of 50%
There were 39.7 billion passenger kilometres in the whole of 2002-03, 1% higher than in 2001-02. In the same year, there were 976 million
passenger journeys, 2% higher than in 2001-02. Freight moved (measured in net tonne kilometres) decreased by 3% between 2001-02 and
2002-03 and freight lifted decreased by 8% over the same period. SRA
Transport trends are
usually assessed by
data response
questions. Note the
equity issues raised:
1) Rail and air are
used mainly by high
income groups
2) 13m low income
households do not
own a car
Around 60% of rail
trips are for
commuting and
business travel DfT.
Rail trips represented 6% of total passenger-kilometres in 2001, having grown by 29% since 1980. CfIT
1.5.5 What are the current
UK transport trends for air
transport?
Air is used predominately by high income groups
• Projected doubling of air traffic over the next 20 years,
especially in short haul no frills low cost carriers eg Ryanair
• Premium short haul flights in decline; Long haul flights
affected 11 Sept especially trans-Atlantic traffic
• Airports and ports handle substantial and growing numbers of
passenger movements.
• Sept 11 has affected consumer behaviour with business
travellers substituting video conferencing for flights
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Air Travel Projections
500
400
300
200
100
© Richard Young
0
1998
2005
2010
2015
2020
Ye a r
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1.6 Estimating and Forecasting Transport Data
1.6.1 What is a forecast
A forecast is an estimate of what is likely to occur in the future. Firms base predictions on current data collected from primary or secondary
research methods. Assumptions are made about key variables and their relationships. Statistical tools are used to predict future values
1.6.2 Why are transport
forecasts made?
Private sector transport operators such as Virgin Rail use forecasts to predict likely levels of demand for various services at different prices.
The Dept for Transport needs accurate forecasts to estimate future demand & supply by mode; predict congestion levels and tax revenues.
1.6.3 Data collection
methods are?
Primary (field) research gathers and analyses new data for the first time and for a specific purpose eg a new survey. Secondary (desk)
research gathers and analyses existing data eg current road usage. Researchers consider cost speed accuracy & relevance of each method.
1.6.4 How are surveys
conducted?
The main method of collecting primary data is a survey of a sample of the population. The results of market research may be misleading
because of sampling errors and non sampling errors from questionnaire design, or field worker, respondent or data processor errors
1.6.5 Are there
alternatives to surveys?
Rather than commission a survey a firm may use the Delphi or Panel technique and consult various experts. These experts discuss their own
predictions amongst the group until a consensus view is reached eg the panel predicts journeys will rise 5% in the next 12 months.
The historical analogy method bases the forecast for one product on the experience of similar products. Eg using the demand pattern for
London congestion charging to predict impact of national road charging. Analogy is a comparison between different things
1.6.6 What is an
economic model
An economic model is a simulation of a real world situation. Models require:
• Identifying key variables affecting behaviour eg what are the main factors to take into account in modelling car usage decisions?
• Establish and quantify relationships between these variables eg establish the price elasticity of demand for journeys
• Assumptions eg road users have perfect information and the economic growth rate will be x% in two years time.
1.6.7 How does the Dept
for Transport forecast
future trends?
The Department for Transport (DfT) uses historical (secondary) data to estimate current vehicle ownership, rail usage etc. It then estimates
likely trends in factors affecting transport usage eg economic growth and its impact on disposable incomes; price income & cross elasticity
of demand estimates for each mode
1.6.8 Quantitative
forecasting methods are
Many mathematical techniques can be employed to establish patterns in past data on which to base predictions, including:
• Causal methods quantify any cause & effect relationships between variables (correlation) to predict the effect of a change in a
given variable on another. Eg the effect of rise in price on bus journeys ie PED.
• Time series methods map the movement of a variable over time and use techniques such as moving average to eliminate any
seasonal or cyclical factors, and identify the underlying trend. The smoothed trend is then extrapolated (projected forward)
1.6.9 Assumptions in
quantitative forecasting?
Quantitative methods assume future behaviour mirrors today's. Quantitative techniques only work if patterns of behaviour observed in the
past continue into the future eg consumers’ attitudes towards a product remain constant over time
1.6.10 Explain time
series data
Time series data is a set of values observed regularly over time. eg
annually, quarterly, daily, hourly, etc.
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Quarter
Spring 06
Sum 06
Aut 06
Winter 06
Spring 07
Sales
20
25
15
10
22
© Richard Young
Informed decisionmaking requires
reliable data
If demand is predicted
to exceed supply
operators can take
action to increase
capacity or reduce
demand.
Sampling errors
occur because only a
small representative
group are surveyed.
There is always a
chance their answers
may be
unrepresentative.
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1.6.11 What is a time
series graph
Time series graphs plot data on a given variable recorded over time
eg monthly sales by value. Time series data has four components
Trend: overall, persistent, long-term movement
Journeys
Seasonal: regular periodic fluctuations, within a 12-month period
Cyclical: Repeating swings or movements over more than one year
Trend line
Random: Erratic random fluctuations
Extrapolation involves taking an existing trend and projecting it
into the future. Extrapolation may be reliable in the short run given
constant external factors.
Extrapolation is a limited technique. Annual seasonal, cyclical or
random fluctuations can render simple extrapolation useless.
Extrapolation assumes external factors influencing past & present
data will continue.
Short term forecasts are more reliable than long term because
external factors are more stable
Journeys
1.6.12 Explain and
illustrate extrapolation
Time
An upward trend & extrapolated forecast
forecast
actual
A trend is a persistent
long term movement
in a time series eg
upward downward or
cyclical and is found
by removing seasonal
and cyclical factors
Trends are identified
using techniques such
as moving average
which ‘smoothes’ a
data series by
removing seasonal or
cyclical fluctuations.
time
1.6.13 Why might
forecasts be wrong?
A trend may be based on inaccurate data or wrongly interpreted results making any extrapolation unreliable. Extrapolating a trend to
forecast the future ignores the potential impact of changing technologies, buying habits and rivals actions. Forecasts are based on past
data trends. A sudden unexpected change in economic conditions or consumer taste may invalidate future trends.
Key variables may be
ignored eg negative
externalities
1.6.14 Why may models
prove inaccurate?
The specification and stability of statistical relationships used in the model may change over time. A model may leave out of factors that
do not currently affect consumer behaviour but may in future be important determinants of transport demand.
1.6.15 What are the main
problems firms
experience in estimating
elasticities
Elasticity is difficult and costly to measure and findings are only estimates. Elasticity estimates should be treated with caution:
• Collecting and interpreting data is expensive and time consuming
• Surveys are prone to statistical error eg sampling and non sampling errors
• Historical data may no longer be relevant – consumer behaviour changes. Incomplete data may make predictions unreliable
Eurotunnel forecasts
did not take into
account low cost air
flights between
London and Paris
Many factors affect
demand and supply.
1.6.16 Can the
government change
transport trends?
Any government policy that affects the supply or demand for transport influences transport trends. Eg fiscal policy changes tax levels hence
disposable income; road pricing directly affects the cost of motoring; rail and bus subsides encourage the use of substitutes for cars –
heavily dependent of the cross elasticities of demand
Inelastic demand for
road transport limits
policy
Tutor2u Transport Economics Q&A 2006 Edition
© Richard Young
Page 17