MIT 1 201 - Transportation Costs (68 pages)

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Transportation Costs



Previewing pages 1, 2, 3, 4, 5, 32, 33, 34, 35, 64, 65, 66, 67, 68 of actual document.

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Transportation Costs

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Pages:
68
School:
Massachusetts Institute of Technology
Course:
1 201 - Transportation Systems Analysis: Demand and Economics
Transportation Systems Analysis: Demand and Economics Documents
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1 201 Introduction to Transportation Systems Transportation Costs Carl D Martland Courtesy of Carl D Martland Used with permission Transportation Costs Introduction Motivation Duality of Production Functions Cost Functions Types of Cost Functions Engineering Cost Functions High Costs Poor Productivity Peak Traffic Demands Cause Delays at Bottlenecks Clark Junction CTA Photo C D Martland January 2003 High Costs Poor Productivity Capacity for Peak Loads Tate Modern Subway Station London Photo C D Martland October 2002 High Costs Poor Productivity Limits on Vehicle Size Weights Photos C D Martland Improving Costs Productivity Tailoring Services to Demand San Juan Puerto Rico Photo C D Martland Improving Costs Productivity Information Control Photo C D Martland Improving Costs Productivity Increasing Vehicle Size Weight Photos C D Martland Duality of Costs Productivity Cost Function Minimize cost of resources required to produce desired services Production Function Maximize value of output obtained from given resources Basic Economic Concepts Differing Perspectives of Economists and Engineers Production functions Economists either assume this is known or try to estimate a very aggregate model based upon actual performance Engineers are constantly trying to improve productivity i e find better ways to use resources to produce more or better goods and services Cost functions Both use total average variable and marginal costs engineers go into much greater detail than economists Short run and long run cost functions Economists typically focus on effects of volume and prices Engineers typically focus on costs and capacity Duality of production and cost functions Using Average and Marginal Costs Profitability Subsidy Requirements Comparison of average costs and average revenue Average revenue per trip is a natural way to look at revenue so this becomes a useful way to look at costs Profitablity of a particular trip Comparison of marginal cost and marginal revenue Economic efficiency or business common sense Price MC Price MC Regulation of industries with declining costs May need to segment markets and have differential pricing in order to cover total costs Fixed vs Variable Costs Fixed Costs Unaffected by changes in activity level over a feasible range of operations for a given capacity or capability over a reasonable time period For greater changes in activity levels or for shutdowns the fixed cost can of course vary Examples insurance rent CEO salary Variable Costs Vary with the level of activity Examples construction labor fuel costs supplies Incremental Costs Added costs for increment of activity Fixed Variable and Incremental Costs Total Cost V Fixed Cost f volume Avg Cost V Fixed Cost V f volume V Incremental Cost V0 V1 f V1 f v0 Marginal Cost V d Total Cost dV f V Assuming we in fact have a differentiable function for variable costs Long Run Short Run Costs Long run costs All inputs can vary to get the optimal cost Because of time delays in reaching equilibrium and the high costs of changing transportation infrastructure this may be a rather idealized concept in many systems Short run costs Some possibly many inputs are fixed The short run cost function assumes that the optimal combination of the optional inputs are used together with the fixed inputs A Simple Linear Cost Function TC a bV 50 V 10 V 100 200 FC VC TC Cost 150 100 TC VC FC 50 0 10 20 30 40 50 60 Volume 70 80 90 100 A Simple Linear Cost Function Avg Cost a V b 50 V 1 Marginal Cost V d TC dv b 1 7 Average Cost Marginal Cost 6 Cost 5 4 3 2 Average Cost Marginal Cost 1 0 10 20 30 40 50 Volume 60 70 80 90 100 Classic Tradeoff Can we afford higher fixed costs in order to get lower variable costs Breakeven point B is where TC1 TC2 180 160 Cost 140 120 TC2 95 V 2 B TC 50 V 100 80 TC Base 60 TC High Tech 40 10 20 30 40 50 60 70 Volume 80 90 100 110 120 More Comments CEE Projects Typical major projects reduce both marginal and average costs per unit of capacity Will there be sufficient demand to allow prices that cover average costs In general smaller projects will be better at low volumes until poor service and congestion hurt performance 45 Base Cost 40 35 30 25 20 15 Volume Large Project Some Other Cost Terminology Opportunity Cost A key economic concept What else could be done with these resources Sunk Cost Expenditures that cannot be recovered and that are common to all options and therefore can be ignored focus on the differences Direct Indirect and Standard Costs Direct easily related to a measurable activity or output Excavation cost cu yd Indirect or overhead or burden ther costs related to the overall operation Utilities marketing property tax Standard costs used in budgeting estimating control Even More Cost Terminology Recurring vs Non recurring costs Recurring repetitive could be fixed or variable Non recurring typically the one time expense of getting started Cost vs Expense Expense is a specific cash or other expenditure that can be followed in the accounting system Depreciation is a non cash expense according to tax rules Repayment of principal on a loan is definitely cash but not a current expense item Cost can refer to non financial matters such as lost time aggravation or pollution Special Characteristics of Transportation Costs Infrastructure and equipment last a long time Life cycle costing Deterioration rates condition assessment and need for maintenance and rehabilitation Transportation takes place over a network space is critical Cost of network vs cost of operation Congestion Output is complex Lifecycle Cost Greatest Potential For Lifecycle Savings is in Design 90 Construct 80 Annual Expense 70 60 50 Still possible to make some modifications in design or materials Expand 40 30 20 10 Operate Decommission Design 0 Salvage 10 Time Easy to modify design and materials Limited ability to modify infrastructure or operation Few options cost already incurred Net Present Value NPV The NPV is an estimate of the current value of future net benefits Given Future Value t B t C t Discount Rate i Then NPV t B t C t 1 i t after t years NPV cash flows B t C t 1 i t Annuity An annuity is a sequence of equal payments over a period of time To find an annuity that is equivalent to an arbitrary sequence of cash flows Step 1 convert cash flows to NPV Step 2 convert NPV to an annuity A A NPV A P i N NPV i 1 i N 1 i N 1 PMT NPV i N in Excel Cash Flows NPV and Equivalent Uniform Annual Net Benefits 50 40 Millions of Dollars 30


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