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Transportation Economics AG BM 102

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Page 1: Transportation Economics AG BM 102. Introduction Transportation costs are a defining issue for rural America Far from markets, far from source of purchased

Transportation Economics

AG BM 102

Page 2: Transportation Economics AG BM 102. Introduction Transportation costs are a defining issue for rural America Far from markets, far from source of purchased
Page 3: Transportation Economics AG BM 102. Introduction Transportation costs are a defining issue for rural America Far from markets, far from source of purchased

Introduction

• Transportation costs are a defining issue for rural America

• Far from markets, far from source of purchased inputs - Alaska

• It makes farming in isolated areas less profitable

• Lowers land prices

Page 4: Transportation Economics AG BM 102. Introduction Transportation costs are a defining issue for rural America Far from markets, far from source of purchased

Efficient Organization within Market Areas

• How big should schools be?

• How big should hospitals be?

• How big should milk plants be?

Page 5: Transportation Economics AG BM 102. Introduction Transportation costs are a defining issue for rural America Far from markets, far from source of purchased
Page 6: Transportation Economics AG BM 102. Introduction Transportation costs are a defining issue for rural America Far from markets, far from source of purchased
Page 7: Transportation Economics AG BM 102. Introduction Transportation costs are a defining issue for rural America Far from markets, far from source of purchased

• Area in circle grows with square of radius

• Therefore cost of getting more goods increases, but at a decreasing rate.

• The last mile gained more new area than the one before

• Amount of output per square mile affects collection or distribution costs – Red line is Midwest (no mountains) Blue - PA

Page 8: Transportation Economics AG BM 102. Introduction Transportation costs are a defining issue for rural America Far from markets, far from source of purchased
Page 9: Transportation Economics AG BM 102. Introduction Transportation costs are a defining issue for rural America Far from markets, far from source of purchased

Consolidating Schools

• Bigger school can offer more programs

• Efficiencies of administration

• Richer curriculum

• Have a better football team

• But students must come farther

• Long rides on a school bus

Page 10: Transportation Economics AG BM 102. Introduction Transportation costs are a defining issue for rural America Far from markets, far from source of purchased

Economics of hospitals

• Small hospitals very expensive to run• Surplus beds• Lack of specialized doctors• Insurance costs• Big hospitals require more patient travel• Plus travel for their families• Helicopter • Hotel stays

Page 11: Transportation Economics AG BM 102. Introduction Transportation costs are a defining issue for rural America Far from markets, far from source of purchased

Grocery stores

• Large stores have more inventory

• Can have more non-foods

• Efficiencies of management

• Customers must travel farther

• Supermarkets killed corner grocery (and small town grocery)

• Further growth created convenience stores

Page 12: Transportation Economics AG BM 102. Introduction Transportation costs are a defining issue for rural America Far from markets, far from source of purchased

Market Boundaries

• Transport costs create captive markets

• They also create logical market boundaries

• Consider two factories each paying $9/ cwt. for potatoes at the plant gate

• If market B wants more milk raises price and boundary moves

Page 13: Transportation Economics AG BM 102. Introduction Transportation costs are a defining issue for rural America Far from markets, far from source of purchased
Page 14: Transportation Economics AG BM 102. Introduction Transportation costs are a defining issue for rural America Far from markets, far from source of purchased
Page 15: Transportation Economics AG BM 102. Introduction Transportation costs are a defining issue for rural America Far from markets, far from source of purchased

Concluding Comments

• Once you understand transport costs some things in rural America make more sense

• How many feed mills are needed?

• How many milk plants?

• How many Sheetz stores?

• Transportation costs are real and sizeable

• They affect behavior in predictable ways