Supply Theory and Transport Supply

Dr.Mongkut Piantanakulchai

CES 341 Transportation Engineering and Planning

Contents
Costs and Cost Functions Total Cost Function (TC) Average Cost Function (AC) Marginal Cost Function (MC) Economy of Scale Transport Supply Functions Short-Run Supply Function Long-Run Supply Function

Dr.Mongkut Piantanakulchai

CES 341 Transportation Engineering and Planning

Costs and Cost Functions

The cost of transportation is a complex, multidimensional attribute that represents the resources that must be expended in order for transportation to take place. These resources are expended by the supplier, the operator, or the user. The scope of transportation cost extends beyond the monetary components to include characteristics such as the value of time spent in travel, the loss of value of goods while in transit, and the cost of the inconvenience and discomfort of traveling under some conditions. For this reason, it is common in transportation analysis to refer to generalized cost in order to reflect this multidimensionality. Attempts are also often made in transportation analysis to transform all cost components to a single system of units, usually monetary units. This is done by attaching monetary values to units of the other cost components, such as a dollar value for 1 hour of travel time or of delay time. In most analyses involving cost, including transportation supply analysis, one is interested in a relationship between the cost of the system and its output. For example, in analyzing the operating cost of a bus line, one would wish to have a relationship between the cost and the amount of seat-kilometers. Such a relationship between cost and output is referred to as a cost function. There are many types of cost functions that can be developed depending on the types of analysis at hand.

Dr.Mongkut Piantanakulchai

CES 341 Transportation Engineering and Planning

A total cost function (TC) relates the total cost of the system to its output. A total cost function TC(x) relates the total cost of the system TC to its output (x). The total cost is obtained by the summation of fixed cost (FC) and variable cost (VC(x)) An average cost function (AC) is the cost per unit to the output of the system and is obtained by the ratio of the total cost and its output
AC x TC x FC VC ( x) x x

(3.1)

A marginal cost function (MC) relates the gradient of the cost function to output and represents the cost of marginally increasing the output of the system.
MC x TC x TC ( x) TC ( x 1) x

(3.2)

Example 3.1 The following example shows the calculation of costs of operating an urban railway.

Dr.Mongkut Piantanakulchai

CES 341 Transportation Engineering and Planning

Example 3.2 A transport company hauling goods by trucks by the following cost function C 15q1.25 , where C is the total cost of supply q. a) Determine the average cost and the marginal cost function b) Prove that the cost elasticity is 1.25 c) Is there an Economy of scale? Solution a)
Dr.Mongkut Piantanakulchai

AC

C 15q1.25 15q 0.25 q q

CES 341 Transportation Engineering and Planning

MC

C 15 *1.25q 0.25 18.75q 0.25 q

b) Cost elasticity is the ratio of the percentage of change in cost C to the percentage change in supply q
ec C / C C / q MC q / q C/q AC

Therefore

ec

MC 18.75q 0.25 1.25 AC 15q 0.25

c) Hint: Economy of scale exists when average cost decreases as production increases. Therefore economy of scale does not exist because in this example the average cost increases with q increases (by observing at the above average cost function).

Transport Supply Functions

Cost functions that represent a system with a fixed capacity are referred to as short-run functions. When the capacity of the system is expanded as the output level increases, then the resulting cost function is referred to as a long-run function. An example of this is the case of a highway cost function. The total cost as a function of traffic volume for a one-lane facility might look as shown in Figure 3.1.

Dr.Mongkut Piantanakulchai

CES 341 Transportation Engineering and Planning

Figure 3.1 A transport supply function

The rapid increase in cost at higher volumes indicates that the capacity of the highway is reached or exceeded, and there is significant congestion. The supply function relates the attributes of the transportation system, as they are experienced by the users, to the level of output of the system. In other words, it is a function representing a causal

relationship which is the reverse of that of the demand function.

The demand function shows how the traffic volume is affected by the level of service attributes of the transportation system, and the supply function shows how these attributes are influenced by the traffic volume using the system. In order to facilitate equilibrium analysis and traffic estimation, one normally uses the same variables to describe traffic and level of service in both these functions. If we think of most levels of service attributes as components of transportation cost, then the supply

function would be analogous to a user average cost function, since it is the average cost incurred by
each unit of traffic which will determine actual traffic volume that is to materialize. For the same reason, it is important to think of the supply function as giving the

Dr.Mongkut Piantanakulchai

CES 341 Transportation Engineering and Planning

relation between traffic and the perceived cost of travel. A long-run function incorporating the effect of increasing the facility capacity of the highway by adding lanes might look as shown in Figure 3.2, in which the curve for each level of capacity is derived in the same manner as in the above example. The envelope of these curves, identified on the basis of the timing of capacity expansion, results in long-run supply function.

Figure 3.2 A long-run highway supply function for automobile travel

Additional Reading
1. Transportation Engineering: An Introduction by C.Jotin Khisty and B.Kent Lall. 2nd Edition. Prentice-Hall International Inc., Chapter 2 2. Transportation Demand Analysis, by Adib Kanafani, McGraw-Hill, Inc., 1983.

Dr.Mongkut Piantanakulchai

CES 341 Transportation Engineering and Planning