Malaysian Tourists Visiting To Thailand Tourism Essay

Malaysian Tourists Visiting To Thailand Tourism Essay Tourism has been considered as an activity of global importance. It brings benefits to a country in term of social and economic. Recently, tourism appears to be an increasingly important industry in many border areas such as Danok in Southern Thailand. Cross border tourism is often proposed by governments as an incentive for economic growth. Therefore, many tourist destinations exist across boundaries. For example, there are a lot of attractive restaurants and entertainment provided in Danok, Southern Thailand. Border-crossing points that join adjacent countries commonly become hives of international economic activity (Kenneth, R. Lord, Sanjay Putrevu and H. G. Parsa, 2004). According to Andriesse (2008), he states that in year 1994, the Malaysian South-North highway reached the Thailand border, after which Thai authorities upgraded the road to Hat Yai. Bukit Kayu Hitam (north of Changlun) and Danok (south of Sadao) have become thriving business centers. According to Praman Tepsongkr oh (2007), the nature of political boundaries and the relationships between neighboring countries usually create the types of tourist attractions that exist in border regions. Consumers living within a manageable drive of the border cross to the neighboring country for such diverse activities as shopping, entertainment, sightseeing, work-related travel, or merely the prospect of a different or less-traveled route between two points. Besides that, a new travel trend and patterns involving local border communities and other travelers and tourists using border passes emerged. These trends accelerated with economic and trade growth in border areas. For example, cross border tourism is popular among Malaysian tourists due to easy of crossing to the border of Thailand. Moreover, the application of a border pass is cheap and easy but the border pass just available for Malaysians who born in Perlis, Kedah, Penang and Perak only. For those who want to apply for border pass, they just need to submit two passport size photos, one photocopy of identification card and RM 10. Then, they can get the border pass immediately. As tourists are permitted to cross the border easy, the growth of tourism on both sides is greatly promoted, and touristic areas eventually abut the boundary on both sides. With growing cross border tourism, consumers can be segmented based on demographics characteristics that reflecting a particular emphasis on certain activities or shopping motivations driven from specific needs. Figure 1: The Thai-Malaysian borderlands. Problem statement Profiling of Malaysian tourists visiting to border areas is not widely study among research. According to Mark P. Hampton (2009), cross-border tourism between neighboring states is relatively unexplored in the literature as cited by Timothy and Tosun in 2003. Besides that, according to Praman Tepsongkroh (2007), literature on tourism in the border areas between Thailand and Malaysia is scarce. Moreover, much attention of the academics has been paid on the historical aspects (Koch, 1977; Numnonda, 1967), whereas other works focused on the political conflicts in Southern Thailand (Dulyakasem, 1981; Haemindra, 1976, 1977; Surin Pitsuwan, 1982). Therefore, little is known about the determinant of Malaysian tourists behavior that visiting to the borderland of Thailand. The general impression is more Malaysian tourists flock to Thailand. According to government sources on tourists who crossed the border in 2001, the number of Thai tourists visiting Malaysia was 660,888 while the number of Malaysian tourists visiting Thailand was 1,239,698 (Tepsongkroh, Praman, 2007, pp.8). This showed that the ratio of almost two Malaysians crossed the border to Thailand than every one Thai tourist visiting to Malaysia. Thus, it is important to find out the reasons of why Malaysian tourists like travel to the border of Thailand. It is significant to understand the tourism patterns of Malaysian tourists. However, little systematic empirical research has been conducted to contribute to an understanding of the demographic characteristics, motivations and behavior of Malaysian tourists cross to Thailand border. Therefore, there exists a gap in the empirical knowledge available about the decision making factors that influence Malaysian tourists cross the border to Thailand and there is a need to fill this gap of empirical knowledge. Research objectives To profile Malaysian tourists visiting to Thailand by their demographic and travel patterns. To understand the motivations of Malaysian tourists visiting to Thailand. To evaluate the level of satisfaction of tourists regarding the services and facilities provided at tourist destinations at the border sites between Thailand and Malaysia. Research questions What are the socio-demographic characteristics and travel patterns of Malaysian tourists? What are the motivational factors that influence Malaysian tourists visit to Thailand? What kind of facilities and services that satisfied Malaysian tourists to revisit Thailand? Research hypothesis H0: There is a relationship between Malaysian tourists socio-demographic characteristics and their travel patterns. H1: There is no relationship between Malaysian tourists socio-demographic characteristics and their travel patterns. H0: There is a relationship between motivational factors and Malaysian tourists visit to Thailand. H1: There is no relationship between motivational factors and Malaysian tourists visit to Thailand. H0: There is a relationship between Malaysian tourists satisfaction and their decision to revisit Thailand. H1: There is no relationship between Malaysian tourists satisfaction and their decision to revisit Thailand. Dependent Variable Decision making To decide whether to travel or not Independent Variable Socio-demographic characteristics Motivation Satisfaction Conceptual framework Figure 1: Variables used in this study Definition of key terms Cross border tourism Cross border tourism can be modeled from the neo-classical economics theoretical demand framework based on an individual/consumer visiting neighboring countries with the purpose of directly consuming goods and services which are cheaper in that country and/or are unavailable in the country of origin (Witt Witt, 1992). Socio-demographic Socio-demographic are the characteristics of a human population. Socio-demographic variables such as age, income, nationality and education have been considered as relatively usable, since they are easy to measure (Lawson, 1994) and they are identified as appropriate determinants of tourist behavior (Kastenholz, 2002; Baloglu Brinberg, 1997; Gitelson Kerstetter, 1990). Profiling In this study, profiling can be defined as the act of collecting useful information about the demographic characteristics of Malaysian tourists in order to give a description of their travel pattern (Oxord, 7th edition). In addition, profile of visitors is providing a better understanding to forecast of travel behavior (Suleiman, J. S and Mohamed, B., 2011). Motivation Motivation can be described as the driving force within individuals that impels them to action. This driving force is produced as a result of an unfulfilled need (Schiffman Kanuk, 2000). The concept behind the motivation theory is that people are driven by internal motivates (called push factors) and attracted to destination attributes (called pull factors) when making their travel decisions (Dann, 1977). Satisfaction Satisfaction can be defined as a judgment that a product or service feature, or the product or service itself, provides a pleasurable level of consumption-related fulfillment (Oliver, 1997) or as an overall evaluation of a purchase (Fornell, 1992). Besides that, Engel et al. (1995) stated that satisfaction was an outcome experience that at least met or exceeded expectations. Decision making Leads to the final choice of a travel destination which is influenced by a number of psychological (internal) and non-psychological (external) variables (Dellaert, Etterma Lindh, 1998). Delimitation Small sample size due to lack of manpower Although the population is large, this study only represents a small group of Malaysian tourists who visit to Thailand through immigration border checkpoint particularly in Bukit Kayu Hitam, Kedah only. Data collection cannot cover all the respondents due to lack of manpower to distribute questionnaires and collect data. Cooperation from respondents seems to be difficult In order to obtain accuracy data that cover many respondents different in terms of demographic, the survey should be conducted on weekend because most of the Malaysian tourists will visit to Thailand during weekend. However, the congestion problem always occurs at the immigration border checkpoint in Bukit Kayu Hitam especially during weekend. Therefore, the cooperation from respondents seems to be difficult. The respondents are not willing to answer the questionnaire because they want to rush back home after waiting a long queue at the immigration border checkpoint. Besides that, some of the respondents are not willing to response because they are not well-versed in using English. Limited fund and time-consuming The questionnaire survey in this study involves a high cost and long time. The research need to go more than once times in order to cover as many different respondents and to collect accuracy data. However, the transportation fee for the route from UUM to Bukit Kayu Hitam is quite expensive and there is limited fund provided for conducting this survey. Significance of this study This study is expected to contribute to an understanding of travel pattern of Malaysian tourists who travel to borderland of Thailand by examining their demographic characteristic, motivation and satisfaction. The results of the study help tourism marketers in Thailand better understand Malaysian tourists travel pattern. Besides that, the results of this study are expected to present important marketing implications for Thailand in efforts to segment and target Malaysian travelers. For the policy maker of Thailand, they can improve their facilities and build appropriate facilities in border area in order to attract more Malaysian tourists and satisfy their needs. On the other hand, this study also can help tourism marketers in Malaysia to better understand the attraction and facilities available in Thailand that attract Malaysian tourists. Therefore, the marketers can develop new tourist attraction or better facilities in Malaysia in order to attract the Thai people come to visit Mal aysia and decrease the flow of Malaysians to Thailand. In addition, this study also contributes the knowledge on cross border study. Chapter II Literature Review This chapter reviews the literature in the context of this study. Related literature in this chapter is focused on cross border tourism in tourism studies, socio demographic characteristics, tourists motivation and tourists satisfaction. Firstly, this chapter reviews the literature on cross border tourism. Secondly, this chapter discusses previous research on socio-demographic characteristic and analyzing the relationship between socio-demographic characteristic and tourists travel pattern. Thirdly, this chapter will review the literature on tourists motivation and the relationship between tourists motivation and choice of destination. Finally, this chapter reviews the literature on tourists satisfaction and identifies the relationship among tourists satisfaction and attributes of destinations. Cross border tourism According to Mark P. Hampton (2009), there is no agreed definition of cross- border tourism, but here, and following Timothy and Butler (1995), it is proposed that a day trip (whether leisure, business, VFR or grocery shopping) is a form of tourism if it crosses an international border. On the other hand, Praman Tepsongkroh (2007), cited from Witt Witt (1992) stated that cross-border tourism can be modeled from the neo-classical economics theoretical demand framework based on individual tourist/consumer visiting neighboring countries with the purpose of directly consuming goods and services which are cheaper in that country and/or are unavailable in the country of origin. Border-crossing points that join adjacent countries commonly become hives of international economic activity (Kenneth, R. Lord, Sanjay Putrevu and H. G. Parsa, 2004). Consumers living within a manageable drive of the border cross to the neighboring country for such diverse activities as shopping, entertainment, sig htseeing, work-related travel, or merely the prospect of a different or less- traveled route between two points. In addition, it is suggested that any working definition of cross border tourism also requires an element of geographical proximity such as seen between the US and Canada, or Singapore and Malaysia or Malaysia and Thailand (Hampton, M.P., 2009). In other words, cross border tourism requires a common border. Besides that, the ease of cross border linkages is significant. As tourists are permitted to cross the border easily, the growth of tourism on both sides is greatly promoted, and touristic areas eventually abut the boundary on both sides (Ahmad Puad, M. S. Badaruddin, M. Kong-Yew, W, 2005). Mark P. Hampton (2009) reported that Frances success in attracting 76 million international arrivals in 2005 due to the ease of border crossing with neighboring EU countries. Moreover, Timothy (1995) said that the level of attractiveness of border areas for tourists depends on a number of factors including the natural, social, cultural environment near the border and the degree of freedom or difficulty in crossing it. According to Praman Tepsongkroh (2007), cross border tourism provides interesting perspectives across disciplines. Matinez (1994) looked at the cross-border interaction in terms of pattern of human movement between adjacent countries. His assessment of the interaction fell into four part typology. Firstly, alienated borderlands are the ones where day-to-day communication and interaction are almost entirely absent. Secondly, coexistent borderlands are those where the frontier is slightly open to minimal levels of interaction. Thirdly, interdependent borderlands are characterized by willingness between adjacent countries to establish cross-frontier networks and partnerships. Finally, integrated borderlands are found where all significant political and economic barriers have been abolished, resulting in free flow of goods and people (Matinez, 1994). Therefore, from Matinezs (1994) perspective, it can be said that boundaries are usually viewed as barriers to interaction, both perceptuall y and in reality. In many cases, they may be regarded as lines of contact and cooperation between similar or dissimilar cultural, economic, and social systems. Timothy (2001) defined some of the connections between boundaries and tourism, which are three-fold typology of spatial relationships between borders and tourists, as shown in the following situations: (a) The boundary line is distant from tourist areas (b) A tourist zone exists adjacent to the boundary on only one side (c) Tourist zones that extend across, or meet at, borders According to Timothy (2001), in the first case, the frontier functions as a barrier or simple line of transit. Thus, the influence of the border depends largely on its degree of permeability. This is a common phenomenon for borders of many countries having a good relationship with the adjacent states. In the second case, in addition to being attracted to the tourist-oriented side, some people will be attracted to visit the other side as well, which presents opportunities for tourism development to spill over into the non-tourist side of the border. In the third instance, there may be communication and cooperation between the two sides so that the entire nature of cultural attraction system operates as one entity, or conversely, the border may act as a significant barrier altogether (Timothy, 2001). Cross border tourism is influenced by governmental policy and socio-economic factors such as trade treaties, sales tax rebates, inflation, exchange rates, shopping preferences and many other factors (Tepsongkroh, P., 2007). Border-related policies, differences in administrative structures on opposite sides, and the physical barrier creates by borders can affect many aspects of tourism, including travel motivations and decision making, infrastructure development, marketing and promotion and place image (Timothy, 2001). According to Praman Tepsongkroh (2007), such obstacles can hinder the flow of tourists and can help to shape the physical and socio-economic development of tourism in the destination regions elsewhere, as well as at the Thai and Malaysian border. Socio-demographic characteristics According to Thirathanaphak, C. Akethammasiri, K. and Chainimit, P. (2009), socioeconomic, demographic and behavioral indicators are commonly used in tourism research to profile tourists by age, gender, income, marital status, occupations, education or ethnic background. These indicators are easy to identify and use in marketing decisions (Yavuz, 1994). Moreover, according to Handler, I (2009), he said that Pearce, (2005); Kotler, (2006), Middleton Clarke, (2007); Dickman, (1999) stated that one of the most common ways to divide tourists is by demographic factors, i.e. age, gender, education, occupation, expenditure or their geographic location. Furthermore, according to Suleiman, J.S Mohamed, B. (2011), generally socio-demographic variables such as age, income, nationality and education have been considered as relatively usable, since they are easy to measure (Lawson, 1994) and they are identified as appropriate determinants of tourist behavior (Kastenholz, 2002; Baloglu Brinberg , 1997; Gitelson Kerstetter, 1990). In addition, according to Beerli, A. Martin, D. (2003), the individuals personal characteristics, such as gender, age, occupation, education and social class, are internal inputs that influence the perceptions of places. When Walmsley and Jenkins (1993) studied the perceived image of different tourist resorts in Australia, they found that the image of some places differed depending on visitors gender and age. Besides that, Baloglu and McCleary (1999) found that an individuals age and level of education influenced the perceived image of various tourist destinations. According to Aswin Sangpikul, (2008), the literature review indicates that there may be a combination of socio-demographic variables that influence tourists behaviors. However, the results of previous studies imply that different sample groups may have different socio-demographic factors influencing their travel-related behaviors (Sangpikul, A., 2008). Furthermore, according to Jang, S.C. Yu, L. Pearson, T.E. (2003), the socio-demographic profiles and trip-related characteristics of the visitors enable tourism marketers to understand who they are and how they behave on travel. Relationship between socio-demographics characteristics and tourist travel pattern Socio-demographic variables are the primary factors that influence peoples travel-related behavior (Zimmer et al., Jang et al., Jang and Wu, 2006). These variables may include age, gender, education, income, economic status and health status. Zimmer et al. (1995) revealed that age, income and education emerged as the main variables that explain participation versus non-participation in travel activities. Their study indicated that income and education influenced travelers when choosing nearby or farther-away destinations, with travelers who were better educated and who had more disposable income being more likely to travel farther from home. These results were echoed by Sirisukul (1998), who found that Thai people with a higher education and higher incomes were more likely to be motivated to participate in leisure activities than those who were less educated and earned less income. Silberberg (1995) identified the cultural/heritage tourist as one who: earned more money and spent more money while on vacation; was more highly educated than the general public; was more likely to be female than male and tended to be in older age categories. Furthermore, Kerstetter, Confer and Graefe (2001) found that tourists with an interest in visiting heritage or cultural sites tend to stay longer, spend more per trip, are more highly educated and have a higher average annual income than the general tourists. In addition, Brining (1995) found that women adopted safer approaches than men when it came to making risky consumer decisions. Barsky Labagh (1997) also reported a lower risk propensity amongst women than men. Besides that, Anderson (1993) stated that tourists ages are closely associated with the meaning tourists attached to crafts and to the purpose crafts served for the owners. According to Littrell (1990) showed that young tourists often valued crafts that reminded them of exciting shopping encounters and active tourism experiences, while older tourists preferred craft items that would bring them aesthetic pleasure through their contemplation at home. Furthermore, a study of tourist night markets in Taiwan carried out by Hsieh and Chang (2004) found that female visitors tend to come with friends or families rather than alone or single visitors spending more time and money compared to married ones. Tourists motivation According to French, et al. (2000), a focus on motivation provides a complex view of various factors to stimulate the travel demands for tourism and embraces both inner needs and wants. These needs and wants reflect perceptions, cultural conditioning and learning. Copper, Shepherd and Westlak (1996) presented Murphys model looking at psychological factors which influence demands (motivations, perceptions and expectations), and how these demanded criteria are linked by intermediaries in the market place (travel agencies and tour operators) with the supply of tourist facilities. Many different categories of motivations have an important influence on travel decision-making; they are as follows (Tepsongkroh, P., 2007): Motivation as a purpose and reason for travel: vacations (holidays, visiting friends and relatives), business (French, et al., 2000) Motivation as individuals needs and wants: Maslows physiological needs, security needs, social needs and self-esteem needs (Hall, 1998). Maslows Physiological Needs Figure 2: Maslows physiological needs Motivation as satisfaction through tourist activities (French, et al., 2000). Physical motivators are related to rest, sports, recreation and those directly connected with a persons health such as spas and baths. These motivators all have one feature in common, the reduction of tension through activities related to physical factors. Cultural motivators are identified by the desires of the traveler to learn about other countries and their art, music, dances, traditions and religions. Interpersonal motivators include a desire to meet new people, visit friends or relatives. Status and prestige motivators are related to the desire for recognition, attention, power and appreciation, as well as the desire to enhance sexual attractiveness. Motivations as pull and push factor; cultural experience, pleasure-seeking/fantasy, and relaxation (Kozak, 2002). Motivation as the integrity of the original factors such as relaxation, social and intellectual aspects (Ryan, 1998). Motivation as important to tourist information: feelings of pleasure, excitement, relaxation (push factors), and tourist attractions like sunshine, friendly people, and culture (pull factors) (Goossens, 2000). According to Kau Lim (2005), understanding tourists vacation motives, i.e. why people travel, is an issue that has been researched extensively. By determining the motivations that influence peoples travel habits and destination selection would enable one to predict their future travel patterns, thereby aid in developing more appropriate marketing strategies to attract them (McGuiggan et al., 1995). Besides that, according to Sangpikul, A (2007), a common and useful theory used to examine tourist motivations is the theory of push and pull motivation as stated by Dann, (1977); Crompton, (1979); Yuan and Mcdonald, (1990); Klenosky, (2002). Moreover, Skourtis, G. Andreou, D. Koniordos, M. Assiouras, I. (2009) cited from Dann (1997), the push factors for a vacation are socio-psychological motives explaining the desire for travel, while the pull factors are motives aroused by the destination explaining the destination choice. According to Kau, A. K. Lim, P. S. (2005), vacation motives can be classified broadly into two main categories, push and pull factors as cited by Crompton, (1979); Dann, (1981). Push factors can be described as internally generated drives, causing the tourist to search for signs in objects, situations and events that contain the promise of reducing prevalent drives (Gnoth, 1997). Pull factors, on the other hand, are those that emerge as a result of the attractiveness of a destination as it is perceived by those with propensity to travel and include both tangible resources, such as beaches, recreation facilities and cultural attractions and travelers perceptions and expectation and marketing image (Uysal and Jurowski, 1994). Push factors have been regarded as useful in explaining the desire for travel, while pull motivations have been used to explain the choice of travel, destination (Crompton, 1979). According to Sangikul, A. (2008), he said that push factors have been thought useful for explaining the desire to go on a vacation, while pull factors help explain the choice of destination as reported by Crompton, (1979). Therefore, Sangikul, A. (2008) said that understanding what motivate peoples travel behavior and destination selection is crucial to predicting their travel decisions and future travel patterns as cited by Cha et al., (1995); Jang and Cai, (2002); Klenosky, (2002); Jang Wu, (2006). Additionally, knowledge about tourist motivation enables tourism marketers to better satisfy travelers needs and provide better products and services corresponding to their needs (Crompton, 1979; Jang and Cai, 2002; Jang and Wu, 2006; Sangikul, 2008). Relationship between tourists motivation and choice of destinations Pizam, Neuman and Reichel (1979) reveal relationships amongst certain motivations and choices related to the trip or destination. According to Prebensen (2006), motivation and the choice of holiday type or activities have been shown to be significantly related. Besides that, Moscardo, Morrison, Pearce, Lang and OLeary (1995) stated that activities are seen as the critical link between tourist motivations and destination choice. Moreover, according to Lien (2010), activities affect tourists choice of destination through travel motivations. Specifically, activities create a motivation of travelling to a destination and the motivation turns into purchase behavior known as choice of the destination. John and Susan (1999) proposed that there are six motives, i.e. physical, emotional, personal, personal development, status and cultural motives. According to lien (2010), he said that the impact between motivation and activities can be explained in a different way. Specifically, with physical motivation, individuals prefer to travel destinations where have activities which can satisfy their needs of relaxation or suntans. Besides that, as for emotional motivation, people may participate in activities that can satisfy their needs for enjoyment of romance, fantasy and spiritual fulfillment. Prebensen (2007) mentioned in the study that in the process of consuming or producing (Holt, 1995) a journey, tourists also experience novel situations, which might result in different choice patterns. Thus, motivations may lead to purchasing behavior, which is destination choosing behavior (Lien, 2010). Individuals who have different motivations may choose the same destinations and they participate similar or different types of activities to satisfy their needs. Tourists Satisfaction Traditional literature within consumer behavior pinpoints that customer satisfaction is the result or the final step of a psychological process from need recognition to evaluation of experienced products (Peter and Olson, 1996). Besides that, according to Oliver (1997), satisfaction is defined as a judgment that a product or service feature, or the product or service itself, provides a pleasurable level of consumption-related fulfillment. In addition, satisfaction also can be defined as an overall evaluation of a purchase (Fornell, 1992). Moreover, according to Raktida Siri (2009), Engel et al. (1995) stated that satisfaction was an outcome experience that at least met or exceeded expectations. According to Hui, J. (2002); Kozak Rimmington, (2000), tourist satisfaction is important to successful destination marketing because it influences the choice of the destination, the consumption of products and services and the decision to return. Therefore, understanding tourist satisfaction is of utmost important for the tourism industry, especially because of its effect on their future economy (Petrick, 2003). Satisfied tourists tend to communicate their positive experience to others (word of mouth) and they tend to buy product repeatedly (Barsky, 1992; Beeho and Prentice, 1997; Hallowell, 1996; Kozak and Rimmington, 2000; Pizam, 1994; Ross, 1993). Raktida Siri (2009), cited from Meng et al. (2006) concluded that there were nine theories on customer satisfaction: expectancy disconfirmation, assimilation or cognitive dissonance, contrast, assimilation contrast, equity, attribution, comparison level, generalized negatively and value perception. Furthermore, among these nine theories, expectation disconfirmation model was accepted the most. Oliver (1980), cited from Kandampully (200) introduced an Expectancy Disconfirmation Model, which was a process of comparison between an expectation and an experience. Satisfaction would occur if the experience met expectation. According to Hui, J. (2002), he said that Chon and Olsen (1991) discovered a goodness of fit correlation between tourists expectations about their destination and tourists satisfaction. Then, after tourist has bought the travel service products, if the evaluation of their experience of the travel product is better than their expectations, they will be satisfied with their travel experience. Besides that, according to Prebensen (2004), by including tourist travel motives and choices of activities at the destination as well as perception of products into the concept of satisfaction, a better understanding of why people become satisfied in addition to how satisfied they are is possible to identify, which further includes a better understanding concerning why people intent to recommend and re-buy the trip. Relationship between tourists satisfaction and destination attributes Huh (2002) stated that there is a need to investigate the relationship between destination attributes and tourists satisfaction from the tourists perspective in order to gain an in-depth understanding of tourists attributes and behavior after they visit a tourist destination. According to Fornell (

Cost Theory

Cost Theory in Economics A central economic concept is that getting something requires giving up something else. For example, earning more money may require working more hours, which costs more leisure time. Economists use cost theory to provide a framework for understanding how individuals and firms allocate resources in such a way that keeps costs low and benefits high. 1. Function * Economists view costs as what an individual or firm must give up to get something else. Opening a manufacturing plant to produce goods requires an outlay of money.Once a plant owner spends money to manufacture goods, that money is no longer available for something else. Production facilities, machinery used in the production process and plant workers are all examples of costs. Cost theory offers an approach to understanding the costs of production that allows firms to determine the level of output that reaps the greatest level of profit at the least cost. 2. Features * Cost theory contains various meas ures of costs. These include a firm's fixed costs and variable costs. The former do not vary with the quantity of goods produced.Rent on a facility is an example of a fixed cost. Variable costs change with the quantity produced. If increased production requires more workers, for example, those workers' wages are variable costs. The sum of fixed and variable costs is a firm's total costs. * Additional Measures * Cost theory derives two additional cost measures. Average total cost is the total cost divided by the number of goods produced. Marginal cost is the increase in total cost that results from increasing production by one unit of output.Marginals–including marginal costs and marginal revenue–are key concepts in mainstream economic thought. Falling and Rising Costs * Economists often use graphs, similar to supply-and-demand charts, to illustrate cost theory and firms' decisions about production. An average total cost curve is a U-shaped curve on an economic diagram. This shape illustrates how average total costs decline as output rises and then rise as marginal costs increase. Average total costs decline at first because as production rises, average costs are distributed over a larger number of units of output.Eventually, marginal costs of increasing output rise, which increases average total costs. Maximizing Profits * Economic theory holds that the goal of a firm is to maximize profit, which equals total revenue minus total cost. Determining a level of production that generates the greatest level of profit is an important consideration, one that means paying attention to marginal costs, as well as marginal revenue (the increase in revenue arising from an increase in output). Under cost theory, as long as marginal revenue exceeds marginal cost, increasing production will raise profit.Types of Cost Economics Economists factor costs in many different ways. Though you may read the cost of a soup can at $1 as it’s listed on the grocery sto re shelf, economists view the cost of the soup can in very different ways. For example, an economist asks what you are giving up to buy that can of soup over another item. They measure the firm’s cost of producing that soup can as it relates to their output and factors of production. Thus, the different types of economic costs are varied. 1. Sunk Cost * A sunk cost is an expense that cannot be recouped.Mark Hirschy, author of the book, â€Å"Fundamentals of Managerial Economics,† explains that sunk costs should not factor into a decision when deciding between alternatives. For example, say a person spent $50,000 on a degree in education and earns $60,000 as a teacher. She is later offered a job in marketing that pays her $80,000. Though she may be tempted to factor in her education degree as reason to stay in her current teaching job, her $50,000 degree is regarded as a sunk cost. She already spent this money, and it cannot be recouped.In this case, she should only com pare the respective salaries of the positions. If all else is held equal, she should pursue the marketing job. Opportunity Cost * An opportunity cost is the value of an alternative choice. Though the word â€Å"cost† usually equates to a numerical value, like a dollar figure, this is not always the case. William Baumol and Alan Blinder, authors of the book, â€Å"Economics: Principles and Policy,† state that an opportunity cost calculates intangible things like time, location and job satisfaction.They explain opportunity costs are what you give up to follow one course of action. For example, a college graduate is deciding between a job as a tech consultant in Seattle or an investment broker in New York City. If the grad pursues the investment broker position, the opportunity costs of foregoing the job in Seattle could be a slower pace of life, $10,000 higher salary and lower costs of living like rent and food. * Marginal Cost * A marginal cost is the amount it takes to produce one more item.Under this view of costs, they vary along the production line and in most cases the cost to produce a good reduces over time. Intuitively, this makes sense: the more proficient you become at producing a good, the faster you can do it and less waste is produced. The savings in labor and material as you achieve â€Å"economies of scale† means the cost of production usually decreases. The way economists find the marginal cost is by taking the derivative of the total costs as it relates to the total output. How to Find Marginal Cost in EconomicsDeciding whether to produce more units is often based on marginal cost. The economic concept of marginal cost is the cost associated with producing one additional unit. This information is important to businesses because it allows the company to decide if the additional unit is worth producing from a financial standpoint. When a company produces a small amount of product, the cost of additional units often decrease. However, marginal costs increase when additional units are added once the production level reaches a minimum. This is based on the law of diminishing marginal returns.Instructions 1. * 1 Calculate the change in total variable cost. This is the amount that the costs increased by after additional units are produced. For example, if you'd like to produce more T-shirts and the increase in output would change the costs by $100, then the total variable cost is $100. * 2 Find the change in quantity produced. This represents how many additional units you would like to produce in the given scenario. For example, the change in quantity would be 50 if you'd like to produce 300 T-shirts instead of 250. * 3 Divide the change in total variable costs from Step 1 by the change in quantity from Step 2. This will give you the marginal cost (marginal cost = the change in total variable cost/the change in quantity). For this example, $100 (the change in total variable cost) / 50 (the change in quantity ) = $2 in marginal costs, which is the cost of producing each additional T-shirt. What Is the Relationship Between Production ; Cost? Production costs are linked to the cost of materials and labor.The relationship between production and cost in any manufacturing process varies based on volume produced and whether any part of the manufacturing process is outsourced or performed by subcontractors. Additionally, production and cost ratios vary based on the amount of automation involved in production and the amount of human oversight and involvement required. 1. Factors of Production * The main factors of production are labor, capital and supply costs. Capital is defined as equipment, cash reserves, and physical location or production facility.Labor is defined as the amount of and cost of manpower required to bring a product to market. This includes not only the physical labor and oversight related to product production, but also the associated costs of salaries of positions such as man agers, delivery drivers, warehouse supervisors, marketing directors and even administrative assistance. Supply costs are any fee associated with securing necessary materials for production. Subcontractor or outsourced work is considered a supply cost as well, as the manufacturer is essentially purchasing a product or service for use in the production process.In this example, work such as offsite creation of product packaging or assembly of minor components of a finished product are considered supply costs in the same way the purchase of raw materials are considered supply costs. Volume of Production * Volume of production figures signify the amount of products being produced. Typically, the greater the volume the lower the cost per unit as raw material suppliers often offer discounts on mass or bulk orders. Volume of production is based on a company’s anticipated product needs, past sales records and placed orders. *Volume of Business * The relationship between production and cost is frequently determined by the volume of business a company is doing. An example that illustrates this point is a multinational vitamin supplement company that produces vitamins in bulk compared to a small health food chain that produces its own vitamin line in small quantities. The cost of the product produced by the small company will typically be greater than the cost of the product offered by the bulk manufacturer because the smaller company produces its product in smaller volumes. Price Points The more it costs a company to produce a product, the greater price the company will have to charge consumers. A company’s production costs include the price of materials, the cost of manpower, the production and packaging process, advertising, and distribution. Mass producers may be able to offer more competitive pricing to end users because they have the luxury of working on a thin margin due to the large volume of production. In microeconomics, the long run is the concept ual time period in which there are no fixed factors of production as to changing the output level by changing the capital stock or by entering or leaving an industry.The long run contrasts with the short run, in which some factors are variable and others are fixed, constraining entry or exit from an industry. In macroeconomics, the long run is the period when the general price level, contractual wage rates, and expectations adjust fully to the state of the economy, in contrast to the short run when these variables may not fully adjust. [1] In the long run, firms change production levels in response to (expected) economic profits or losses, and the land, labor, capital goods and entrepreneurship vary to reach associated long-run average cost.In the simplified case of plant capacity as the only fixed factor, a generic firm can make these changes in the long run: * enter an industry in response to (expected) profits * leave an industry in response to losses * increase its plant in resp onse to profits * decrease its plant in response to losses. Long-run average-cost curve with economies of scale to Q2 and diseconomies of scale thereafter. The long run is associated with the long-run average cost (LRAC) curve in microeconomic models along which a firm would minimize its average cost (cost per unit) for each respective long-run quantity of output.Long-run marginal cost (LRMC) is the added cost of providing an additional unit of service or commodity from changing capacity level to reach the lowest cost associated with that extra output. LRMC equalling price is efficient as to resource allocation in the long run. The concept of long-run cost is also used in determining whether the long-run expected to induce the firm to remain in the industry or shut down production there. In long-run equilibrium of an industry in which perfect competition prevails, the LRMC = Long run average LRAC at the minimum LRAC and associated output.The shape of the long-run marginal and averag e costs curves is determined by economies of scale. The long run is a planning and implementation stage. [2][3] Here a firm may decide that it needs to produce on a larger scale by building a new plant or adding a production line. The firm may decide that new technology should be incorporated into its production process. The firm thus considers all its long-run production options and selects the optimal combination of inputs and technology for its long-run urposes. [4] The optimal combination of inputs is the least-cost combination of inputs for desired level of output when all inputs are variable. [3] Once the decisions are made and implemented and production begins, the firm is operating in the short run with fixed and variable inputs. [3][5] Short run All production in real time occurs in the short run. The short run is the conceptual time period in which at least one factor of production is fixed in amount and others are variable in amount.Costs that are fixed, say from existing plant size, have no impact on a firm's short-run decisions, since only variable costs and revenues affect short-run profits. Such fixed costs raise the associated short-run average cost of an output long-run average cost if the amount of the fixed factor is better suited for a different output level. In the short run, a firm can raise output by increasing the amount of the variable factor(s), say labor through overtime. A generic firm already producing in an industry can make three changes in the short run as a response to reach a posited equilibrium: * increase production decrease production * shut down. In the short run, a profit-maximizing firm will: * increase production if marginal cost is less than marginal revenue (added revenue per additional unit of output); * decrease production if marginal cost is greater than marginal revenue; * continue producing if average variable cost is less than price per unit, even if average total cost is greater than price; * shut down if avera ge variable cost is greater than price at each level of output. Transition from short run to long runThe transition from the short run to the long run may be done by considering some short-run equilibrium that is also a long-run equilibrium as to supply and demand, then comparing that state against a new short-run and long-run equilibrium state from a change that disturbs equilibrium, say in the sales-tax rate, tracing out the short-run adjustment first, then the long-run adjustment. Each is an example of comparative statics. Alfred Marshall (1890) pioneered in comparative-static period analysis. [6] He istinguished between the temporary or market period (with output fixed), the short period, and the long period. â€Å"Classic† contemporary graphical and formal treatments include those of Jacob Viner (1931),[7] John Hicks (1939),[8] and Paul Samuelson (1947). [9] The law of diminishing marginal returns The law of diminishing marginal returns to a variable factor applies to th e short run. [10] It posits an effect of decreased added or marginal product of from variable factors, which increases the supply price of added output. [11] The law is related to a positive slope of the short-run marginal-cost curve. 12] Macroeconomic usages The usage of ‘long run' and ‘short run' in macroeconomics differs somewhat from the above microeconomic usage. J. M. Keynes (1936) emphasized fundamental factors of a market economy that might result in prolonged periods away from full-employment. [13] In later macro usage, the long run is the period in which the price level for the economy is completely flexible as to shifts in aggregate demand and aggregate supply. In addition there is full mobility of labor and capital between sectors of the economy and full capital mobility between nations.In the short run none of these conditions need fully hold. The price is sticky or fixed as to changes in aggregate demand or supply, capital is not fully mobile between sector s, and capital is not fully mobile to interest rate differences among countries & fixed exchange rates. [14] A famous critique of neglecting short-run analysis was by John Maynard Keynes, who wrote that â€Å"In the long run, we are all dead,† referring to the long-run proposition of the quantity theory of, for example, a doubling of the money supply doubling the price level. 15] Marginal  Analysis Thinking at the  Margin From Mike Moffatt, former About. com Guide From an economist's perspective, making choices involves making decisions ‘at the margin' – that is, making decisions based on small changes in resources: * How should I spend the next hour? * How should I spend the next dollar? On the surface, this seems like a strange way of considering the choices made by people and firms. It is rare that someone would consciously ask themselves – ‘How will I spend dollar number 24,387? ‘, ‘How will I spend dollar number 24,388? . Treatin g the problem in this matter does have some distinct advantages: * Doing so leads to the optimal decisions being made, subject to preferences, resources and informational constraints. * It makes the problem less messy from an analytic point of view, as we are not trying to analyze a million decisions at once. * While this does not exactly mimic conscious decision making processes, it does provide results similar to the decisions people actually make. That is, people may not think using this method, but the decisions they make are as if they do.Marginal Analysis – An Example Consider the decision on how many hours to work, as given by the following chart: Hour – Hourly Wage – Value of Time Hour 1 – $10 – $2 Hour 2 – $10 – $2 Hour 3 – $10 – $3 Hour 4 – $10 – $3 Hour 5 – $10 – $4 Hour 6 – $10 – $5 Hour 7 – $10 – $6 Hour 8 – $10 – $8 Hour 9 – $15 â €“ $9 Hour 10 – $15 – $12 Hour 11 – $15 – $18 Hour 12 – $15 – $20 The hourly wage represents what I earn for working an extra hour – it is the marginal gain or the marginal benefit. The value of time is essentially an opportunity cost – it is how much I value having that hour off.In this example it represents a marginal cost – what it costs me by working an additional hour. The increase in marginal costs is a common phenomenon; I do not mind working a few hours since there are 24 hours in a day. I still have plenty of time to do other things. However, as I start to work more hours it reduces the number of hours I have for other activities. I have to start giving up more and more valuable opportunities to work those extra hours. It is clear that I should work the first hour, as I gain $10 in marginal benefits and lose only $2 in marginal costs, for a net gain of $8.By the same logic I should work the second and third hours as well. I will want to work until which time the marginal cost exceeds the marginal benefit. I will want to work the 10th hour as I receive a net benefit of #3 (marginal benefit of $15, marginal cost of $12). However, I will not want to work the 11th hour, as the marginal cost ($18) exceeds the marginal benefit ($15) by three dollars. Thus marginal analysis suggests that rational maximizing behavior is to work for 10 hours. Next Lesson: Market Distortions: Altering the Supply and Demand Equilibrium.Marginal Analysis * Marginal Revenue – Glossary – Dictionary Definition of Marginal Revenue * Marginal Significance Value – Glossary – Dictionary Definition of Marginal Si†¦ * Marginal Revenue and Marginal Cost Practice Question Related Articles * Running a Private Practice – Working with Animals * Work Stress – Long Work Hours Are Not the Culprit * Open for Business: Scheduling Your Week – Being a Personal Trainer * Three Union Work Rules That Increase the Cost of Operating Transit * Hold On to Your Sanity – Start Your Own Business AN INTRODUCTION TOCOST BENEFIT ANALYSIS| * Background * Cost-Benefit Analysis (CBA) estimates and totals up the equivalent money value of the benefits and costs to the community of projects to establish whether they are worthwhile. These projects may be dams and highways or can be training programs and health care systems. * The idea of this economic accounting originated with Jules Dupuit, a French engineer whose 1848 article is still worth reading. The British economist, Alfred Marshall, formulated some of the formal concepts that are at the foundation of CBA.But the practical development of CBA came as a result of the impetus provided by the Federal Navigation Act of 1936. This act required that the U. S. Corps of Engineers carry out projects for the improvement of the waterway system when the total benefits of a project to whomsoever they accrue exceed the costs of t hat project. Thus, the Corps of Engineers had created systematic methods for measuring such benefits and costs. The engineers of the Corps did this without much, if any, assistance from the economics profession.It wasn't until about twenty years later in the 1950's that economists tried to provide a rigorous, consistent set of methods for measuring benefits and costs and deciding whether a project is worthwhile. Some technical issues of CBA have not been wholly resolved even now but the fundamental presented in the following are well established. * Principles of Cost Benefit Analysis * One of the problems of CBA is that the computation of many components of benefits and costs is intuitively obvious but that there are others for which intuition fails to suggest methods of measurement. Therefore some basic principles are needed as a guide. There Must Be a Common Unit of Measurement * In order to reach a conclusion as to the desirability of a project all aspects of the project, positiv e and negative, must be expressed in terms of a common unit; i. e. , there must be a â€Å"bottom line. † The most convenient common unit is money. This means that all benefits and costs of a project should be measured in terms of their equivalent money value. A program may provide benefits which are not directly expressed in terms of dollars but there is some amount of money the recipients of the benefits would consider just as good as the project's benefits.For example, a project may provide for the elderly in an area a free monthly visit to a doctor. The value of that benefit to an elderly recipient is the minimum amount of money that that recipient would take instead of the medical care. This could be less than the market value of the medical care provided. It is assumed that more esoteric benefits such as from preserving open space or historic sites have a finite equivalent money value to the public. * Not only do the benefits and costs of a project have to be expressed in terms of equivalent money value, but they have to be expressed in terms of dollars of a particular time.This is not just due to the differences in the value of dollars at different times because of inflation. A dollar available five years from now is not as good as a dollar available now. This is because a dollar available now can be invested and earn interest for five years and would be worth more than a dollar in five years. If the interest rate is r then a dollar invested for t years will grow to be (1+r)t. Therefore the amount of money that would have to be deposited now so that it would grow to be one dollar t years in the future is (1+r)-t.This called the discounted value or present value of a dollar available t years in the future. * When the dollar value of benefits at some time in the future is multiplied by the discounted value of one dollar at that time in the future the result is discounted present value of that benefit of the project. The same thing applies to costs. The net benefit of the projects is just the sum of the present value of the benefits less the present value of the costs. * The choice of the appropriate interest rate to use for the discounting is a separate issue that will be treated later in this paper. CBA Valuations Should Represent Consumers or Producers Valuations As Revealed by Their Actual Behavior * The valuation of benefits and costs should reflect preferences revealed by choices which have been made. For example, improvements in transportation frequently involve saving time. The question is how to measure the money value of that time saved. The value should not be merely what transportation planners think time should be worth or even what people say their time is worth. The value of time should be that which the public reveals their time is worth through choices involving tradeoffs between time and money.If people have a choice of parking close to their destination for a fee of 50 cents or parking farther away and spend ing 5 minutes more walking and they always choose to spend the money and save the time and effort then they have revealed that their time is more valuable to them than 10 cents per minute. If they were indifferent between the two choices they would have revealed that the value of their time to them was exactly 10 cents per minute. * The most challenging part of CBA is finding past choices which reveal the tradeoffs and equivalencies in preferences.For example, the valuation of the benefit of cleaner air could be established by finding how much less people paid for housing in more polluted areas which otherwise was identical in characteristics and location to housing in less polluted areas. Generally the value of cleaner air to people as revealed by the hard market choices seems to be less than their rhetorical valuation of clean air. * Benefits Are Usually Measured by Market Choices * When consumers make purchases at market prices they reveal that the things they buy are at least as beneficial to them as the money they relinquish.Consumers will increase their consumption of any commodity up to the point where the benefit of an additional unit (marginal benefit) is equal to the marginal cost to them of that unit, the market price. Therefore for any consumer buying some of a commodity, the marginal benefit is equal to the market price. The marginal benefit will decline with the amount consumed just as the market price has to decline to get consumers to consume a greater quantity of the commodity. The relationship between the market price and the quantity consumed is called the demand schedule.Thus the demand schedule provides the information about marginal benefit that is needed to place a money value on an increase in consumption. * Gross Benefits of an Increase in Consumption is an Area Under the Demand Curve * The increase in benefits resulting from an increase in consumption is the sum of the marginal benefit times each incremental increase in consumption. A s the incremental increases considered are taken as smaller and smaller the sum goes to the area under the marginal benefit curve. But the marginal benefit curve is the same as the demand curve so the increase in benefits is the area under the demand curve.As shown in Figure 1 the area is over the range from the lower limit of consumption before the increase to consumption after the increase. * Figure 1 * When the increase in consumption is small compared to the total consumption the gross benefit is adequately approximated, as is shown in a welfare analysis, by the market value of the increased consumption; i. e. , market price times the increase in consumption. * Some Measurements of Benefits Require the Valuation of Human Life * It is sometimes necessary in CBA to evaluate the benefit of saving human lives.There is considerable antipathy in the general public to the idea of placing a dollar value on human life. Economists recognize that it is impossible to fund every project whic h promises to save a human life and that some rational basis is needed to select which projects are approved and which are turned down. The controversy is defused when it is recognized that the benefit of such projects is in reducing the risk of death. There are many cases in which people voluntarily accept increased risks in return for higher pay, such as in the oil fields or mining, or for time savings in higher speed in automobile travel.These choices can be used to estimate the personal cost people place on increased risk and thus the value to them of reduced risk. This computation is equivalent to placing an economic value on the expected number of lives saved. * The Analysis of a Project Should Involve a With Versus Without Comparison * The impact of a project is the difference between what the situation in the study area would be with and without the project. This that when a project is being evaluated the analysis must estimate not only what the situation would be with the p roject but also what it would be without the project.For example, in determining the impact of a fixed guideway rapid transit system such as the Bay Area Rapid Transit (BART) in the San Francisco Bay Area the number of rides that would have been taken on an expansion of the bus system should be deducted from the rides provided by BART and likewise the additional costs of such an expanded bus system would be deducted from the costs of BART. In other words, the alternative to the project must be explicitly specified and considered in the evaluation of the project. Note that the with-and-without comparison is not the same as a before-and-after comparison. Another example shows the importance of considering the impacts of a project and a with-and-without comparison. Suppose an irrigation project proposes to increase cotton production in Arizona. If the United States Department of Agriculture limits the cotton production in the U. S. by a system of quotas then expanded cotton production in Arizona might be offset by a reduction in the cotton production quota for Mississippi. Thus the impact of the project on cotton production in the U. S. might be zero rather than being the amount of cotton produced by the project. * Cost Benefit Analysis Involves a Particular Study Area The impacts of a project are defined for a particular study area, be it a city, region, state, nation or the world. In the above example concerning cotton the impact of the project might be zero for the nation but still be a positive amount for Arizona. * The nature of the study area is usually specified by the organization sponsoring the analysis. Many effects of a project may â€Å"net out† over one study area but not over a smaller one. The specification of the study area may be arbitrary but it may significantly affect the conclusions of the analysis. * Double Counting of Benefits or Costs Must be Avoided Sometimes an impact of a project can be measured in two or more ways. For example, when an improved highway reduces travel time and the risk of injury the value of property in areas served by the highway will be enhanced. The increase in property values due to the project is a very good way, at least in principle, to measure the benefits of a project. But if the increased property values are included then it is unnecessary to include the value of the time and lives saved by the improvement in the highway. The property value went up because of the benefits of the time saving and the reduced risks.To include both the increase in property values and the time saving and risk reduction would involve double counting. * Decision Criteria for Projects * If the discounted present value of the benefits exceeds the discounted present value of the costs then the project is worthwhile. This is equivalent to the condition that the net benefit must be positive. Another equivalent condition is that the ratio of the present value of the benefits to the present value of the costs m ust be greater than one. * If there are more than one mutually exclusive project that have positive net present value then there has to be further analysis.From the set of mutually exclusive projects the one that should be selected is the one with the highest net present value. * If the funds required for carrying out all of the projects with positive net present value are less than the funds available this means the discount rate used in computing the present values is too low and does not reflect the true cost of capital. The present values must be recomputed using a higher discount rate. It may take some trial and error to find a discount rate such that the funds required for the projects with a positive net present value is no more than the funds available.Sometimes as an alternative to this procedure people try to select the best projects on the basis of some measure of goodness such as the internal rate of return or the benefit/cost ratio. This is not valid for several reasons . * The magnitude of the ratio of benefits to costs is to a degree arbitrary because some costs such as operating costs may be deducted from benefits and thus not be included in the cost figure. This is called netting out of operating costs. This netting out may be done for some projects and not for others.This manipulation of the benefits and costs will not affect the net benefits but it may change the benefit/cost ratio. However it will not raise the benefit cost ratio which is less than one to above one. For more on this topic see Benefit/ cost Ratio Magnitude. * An Example * To illustrate how CBA might be applied to a project, let us consider a highway improvement such as the extension of Highway 101 into San Jose. The local four-lane highway which carried the freeway and commuter traffic into San Jose did not have a median divider and its inordinate number of fatal head-on collisions led to the name â€Å"Blood Alley. The improvement of the highway would lead to more capacity which produces time saving and lowers the risk. But inevitably there will be more traffic than was carried by the old highway. * The following is a highly abbreviated analysis using hypothetical data. TRIP DATA| No Extension, â€Å"Blood Alley† Only| 101 Extension and â€Å"Blood Alley†| Rush Hours|   |   | Passenger Trips (per hour)| 3,000| 4,000| Trip Time (minutes)| 50| 30| Value of Time ($/minute)| $0. 10| $0. 10| Nonrush Hours|   |   | Passenger Trips (per hour)| 500| 555. 55| Trip Time (minutes)| 35| 25| Value of Time ($/minute)| $0. 08| $0. 08| Traffic Fatalities per year)| 12| 6| * The data indicates that for rush-hour trips the time cost of a trip is $5 without the project and $3 with it. It is assumed that the operating cost for a vehicle is unaffected by the project and is $4. * The project lowers the cost of a trip and the public responds by increasing the number of trips taken. There is an increase in consumer surplus both for the trips which would have been taken without the project and for the trips which are stimulated by the project. * For trips which would have been taken anyway the benefit of the project equals the value of the time saved times the number of trips.For the rush-hour trip the project saves $2 and for the nonrush-hour trip it saves $0. 80. For the trips generated by the project the benefit is equal to one half of the value of the time saved times the increase in the number of trips. * The benefits per hour are: TYPE| Trips Which Would Be Taken Anyway| Trips Generated By the Project| Total| Rush Hour| 6,000. 00| 1,000. 00| 7,000. 00| Nonrush Hour| 400. 00| 22. 22| 422. 22| * To convert the benefits to an annual basis one multiplies the hourly benefits of each type of trip times the number of hours per year for that type of trip.There are 260 week days per year and at six rush hours per weekday there are 1560 rush hours per year. This leaves 7200 nonrush hours per year. With these figures the annual benefits are: TYPE| Trips Which Would Be Taken Anyway| Trips Generated By the Project| Total| Rush Hour| $9,360,000| $1,560,000| $10,020,000| Nonrush Hour| $2,880,000| $160,000| $3,040,000| Total| $12,240,000| $1,720,000| $13,960,000| * The value of the reduced fatalities may be computed in terms of the equivalent economic value people place upon their lives when making choices concerning risk and money.If the labor market has wages for occupations of different risks such that people accept an increase in the risk of death of 1/1,000 per year in return for an increase in income of $400 per year then a project that reduces the risk of death in a year by 1/1000 gives a benefit to each person affected by it of $400 per year. The implicit valuation of a life in this case is $400,000. Thus benefit of the reduced risk project is the expected number of lives saved times the implicit value of a life. For the highway project this is 6x$400,000= $2,400,000 annually. * The annual benefits of the proje ct are thus:TYPE OF BENEFIT| VALUE OF BENEFITS PER YEAR| Time Saving| $13,960,000| Reduced Risk| $2,400,000| * Let us assume that this level of benefits continues at a constant rate over a thirty-year lifetime of the project. * The cost of the highway consists of the costs for its right-of-way, its construction and its maintenance. The cost of the right-of-way is the cost of the land and any structures upon it which must be purchased before the construction of the highway can begin. For purposes of this example the cost of right-of-way is taken to be $100 million and it must be paid before any construction can begin.At least part of the right-of- way cost for a highway can be recovered at the end of the lifetime of the highway if it is not rebuilt. For the example it is assumed that all of the right-of-way cost is recoverable at the end of the thirty-year lifetime of the project. The construction cost is $200 million spread evenly over a four-year period. Maintenance cost is $1 mill ion per year once the highway is completed. * The schedule of benefits and costs for the project are as follows: TIME (year)| BENEFITS ($millions)| RIGHT-OF -WAY ($millions)| CONSTRUCTION COSTS $millions)| MAINTENANCE ($millions)| 0| 0| 100| 0| 0| 1-4| 0| 0| 50| 0| 5-29| 16. 36| 0| 0| 1| 30| 16. 36| -100| 0| 1| * The benefits and costs are in constant value dollars; i. e. , there was no price increase included in the analysis. Therefore the discount rate used must be the real interest rate. If the interest rate on long term bonds is 8 percent and the rate of inflation is 6 percent then the real rate of interest is 2 percent. Present value of the streams of benefits and costs discounted at a 2 percent back to time zero are as follows:   | PRESENT VALUE $ millions)| Benefits| 304. 11| Costs|   | Right-of-Way| 44. 79| Construction| 190. 39| Maintenance| 18. 59| Total Costs| 253. 77| |   | | Net Benefits| 50. 35| | *independent rounding| * The positive net present value of $50. 35 million and benefit/cost ratio of 1. 2 indicate that the project is worthwhile if the cost of capital is 2 percent. When a discount rate of 3 percent is the benefit/cost ratio is slightly under 1. 0. This means that the internal rate of return is just under 3 percent. When the cost of capital is 3 percent the project is not worthwhile. It should be noted that the market value of the right-of-way understates the opportunity cost of having the land devoted to the highway. The land has a value of $100 million because of its income after property taxes. The economy is paying more for its alternate use but some of the payment is diverted for taxes. The discounted presented value of the payments for the alternate use might be more like $150 million instead of $100 million. Another way of making this point is that one of the costs of the highway is that the local governments lose the property tax on the land used. * Summary By reducing the positive and negative impacts of a project to the ir equivalent money value Cost-Benefit Analysis determines whether on balance the project is worthwhile. The equivalent money value are based upon information derived from consumer and producer market choices; i. e. , the demand and supply schedules for the goods and services affected by the project. Care must be taken to properly allow for such things as inflation. When all this has been considered a worthwhile project is one for which the discounted value of the benefits exceeds the discounted value of the costs; i. . , the net benefits are positive. This is equivalent to the benefit/cost ratio being greater than one and the internal rate of return being greater than the cost of capital. * History of Cost-Benefit Analysis * CBA has its origins in the water development projects of the U. S. Army Corps of Engineers. The Corps of Engineers had its origins in the French engineers hired by George Washington in the American Revolution. For years the only school of engineering in the Uni ted States was the Military Academy at West Point, New York. In 1879, Congress created the Mississippi River Commission to â€Å"prevent destructive floods. † The Commission included civilians but the president had to be an Army engineer and the Corps of Engineers always had veto power over any decision by the Commission. * In 1936 Congress passed the Flood Control Act which contained the wording, â€Å"the Federal Government should improve or participate in the improvement of navigable waters or their tributaries, including watersheds thereof, for flood-control purposes if the benefits to whomsoever they may accrue are in excess of the estimated costs. The phrase if the benefits to whomsoever they may accrue are in excess of the estimated costs established cost-benefit analysis. Initially the Corps of Engineers developed ad hoc methods for estimating benefits and costs. It wasn't until the 1950s that academic economists discovered that the Corps had developed a system for t he economic analysis of public investments. Economists have influenced and improved the Corps' methods since then and cost-benefit analysis has been adapted to most areas of public decision-making.

The Difficult Subject of Poverty - 590 Words

Poverty is a difficult subject to talk about for anybody. While, some people choose to ignore it and think that it only occurs in other parts of the world. Some people have to deal with it on a daily basis here in America. John Galbraith, Karl Marx, Robert Reich have all written their ideas down about poverty; although what they wrote was very different they also share many similarities. Most of the human population is in poverty and live on less than $10 a day. This is an ever growing problem with no reasonable solution that will lead to a short term answer or any way to ever solve an issue this immense. â€Å"Why the Rich Are Getting Richer and the Poor Poorer† was written by Robert Reich. Throughout this article he discusses the increasing differences between the highest social class and the lowest social class. Reich uses the title, a common figure of speech, to further explain the worsening differences of the economy. Reich even goes as far as to compare the human p opulation to a boat; he states that humans are split into two boats most are in a sinking boat and the rest are on another, one that is constantly is rising. The author states that the lower class is trapped in a loop of poverty due to a loss of jobs. The main reason for the loss of jobs is mankind is relying more heavily on robots and computers. Another factor is that companies can build factories in other countries without labor unions and pay their workers very little and make immense amounts ofShow MoreRelatedEducation and Poverty Essay978 Words   |  4 Pagesï » ¿Exploring Poverty and Education Education and poverty is a difficult subject to explore. 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Essay The Optimists Daughter A Look at Death and Dying

The Optimists Daughter: A Look at Death and Dying Fay struck out with her hands, hitting at Major Bullock and Mr. Pitts and Sis, fighting with her mother, too, for a moment. She showed her claws at Laurel, and broke from the preachers last-minute arms and threw herself forward across the coffin on to the pillow, driving her lips without aim against the face under hers. She was dragged back into the library, screaming, by Miss Tennyson Bullock, out of sight behind the blanket of greenery. Judge McKelvas smoking chair lay behind them, overturned (86). This is a short excerpt from The Optimists Daughter (1972) by the Pulitzer Prize winner for fiction, Eudora Welty. The story is centered around Laurel McKelva Hand, a†¦show more content†¦Many people are very open while some people shut off completely. In The Optimists Daughter everyone has to deal with the death of Judge McKelva. For example, Fay grieves for everyone to see. Eudora Welty uses the five elements of characters (speech, appearance, thoughts, how other characters in the story perceive them, and actions) to show how different people react to death and dying. Elements such as tone and word choice are what define a characters speech. The speech is easily defined by the author because it is described throughout conversations between characters. Appearance is an element that the author can describe using a characters features and clothing. Actions are another way to let a character take on more than one dimension. In The Optimists Daughter, however, it may be hard because there is very little action that takes place. This is why Welty uses the last two elements of creating a character, thoughts and how other characters react to them. Judge McKelvas wife is probably not the most well developed character, but she is very defined. Fay reacts to everything, including the death of her husband, very dramatically. When the judge is dying Fay is frantic, yet she doesnt really seem to be grieving. She is acting how she is suppose to act or how she thinks people would expect her to. She does this for two reasons; the first being for attention, and the second reason she acts this way is because she is playing the part of aShow MoreRelatedEudora Welty a Worn Path12166 Words   |  49 PagesProgress Administration (WPA) photographer, a job that took her on assignments throughout Mississippi. The experience of traveling throughout the South in order to observe people gave her the impetus to begin writing stories. Her first published story, Death of a Traveling Salesman, was accepted in the journal Manuscript, and within two years her work was being accepted in many publications, including the Atlantic and the Southern Review . Welty has never married, and despite stints in Wisconsin in collegeRead MoreEudora Welty a Worn Path12173 Words   |  49 PagesProgress Administration (WPA) photographer, a job that took her on assignments throughout Mississippi. The experience of traveling throughout the South in order to observe people gave her the impetus to begin writing stories. Her first published story, Death of a Traveling Salesman, was accepted in the journal Manuscript, and within two years her work was being accepted in many publications, including the Atlantic and the Southern Review. Welty has never married, and despite stints in Wisconsin in college