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Ticket costs and prices - how estimations are done

Posted by: Ekkehard Augustin - Mon Jun 13, 2005 12:17 pm
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Ticket costs and prices - how estimations are done 
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Post Ticket costs and prices - how estimations are done   Posted on: Mon Jun 13, 2005 12:17 pm
Because of the discussion(s) about estimations of ticket costs and prices of private or touristic space travel I will explain here

1. how estimations are done in Economics,
2. how statistics are applied in Economics,
3. for what purposes statistics are applied in Economics.

There are several methods of estimation etc.. When I have to refer to analysing costs I will lnk to that thread as far as required and/or possible.



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Post    Posted on: Mon Jun 20, 2005 11:39 am
To link together what has been said in Costs - space travel-oriented, examination etc. up to now and the threads A scientific economic estimation and Prof. Collins' answer and estimated numbers on the other side I have to start with the question which way the contents of the Costs-thread can be applied to reality.

The application of that theoretical explanations require real data. But where to get them? How can we look into the reality?

1. Vehicles, machines etc. are produced by companies and offered then at the markets - so we simply have to look to the markets and see what's offered there. We will get informations about capacities (=scales) and variable costs then and can insert all the data into lists and tables.

2. Most companies have to publish business reports, do public relations and so on. So there are public informations about what vehicles, machines and so on they buy and use. As well the suppliers provide public informations.

3. Talks and questions to engineers get us curvatures about efficiency etc. of vehicles and machines.

All this together inserted into lists and tables can be used to find the functions and diagrams and then the potential of degressions of costs and economies of scale possible can be seen.

From this it can be derived what will be if nothing but demand changes - but it misses to take into account how the offered vehicles and machines change or may change as time goes by. This problme will be handled a later.

This already is statistics and one of its applications.

But what matters is the whole company regarding each company. There one machine not only involved in production but many of different nature. And organization, coordinations etc. is involved too - so which way to get insight into economies of scale etc.?

Normatively it's assumed that companies struggle to work optimally - this menas that they will optimize costs and this means they will be at that point og their cost function where it touches the function of economies of scale.

The problem with it is that we then see only one point but not the complete curvature. Fortunately the companies supplying products at a market in parallel are of different size and so there is a chance that they apply machines etc. of different scale in parallel. So it's sufficient to look at each company get the data and insert them into a table and derive the function of economies of scale.

This is realy statistics now - but no extrapolation into the future. It is an exact image of the presence. Regression can be applied and the function is got.

In the first half of the past century two scientists have done really this - their names were Cobb and Douglas. They gathered the data and calculated the regression. They tried several alternatives until they found the best fit - the function they got is Y = A*L^a + C^b. L is labour and C is capital and a = 1-b is valid - a and b are so-called elasticities of production. This can easyly be transformed into costs without a change of the shape of the curvature - it has a diminishing positive slope. By division by the Y the economies of scale can be seen.

This is an example only - there are other cost functions too.

Up to now these are first applications of statistics only - but no estimations or the like.

Do you have questions about this?



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Post    Posted on: Tue Jun 21, 2005 10:22 am
Next machines and vehicles have a relatively long lifetime compared to bread, chocoalte and the like. The capacity is a large investment which has to be depreciated and the depreciations have to be earned back at the markets.

This means that each machine or vehicle will be used and in service for up to 10 years.

So if we know when a company got a machine installed and what date we have when an analysis is done then we know up to which future date the results will be be valid - plus we know when we have to expect changes.

This way we have got data about the future without extrapolations or estimations.

Now some parts of a company's equipment changes while other parts don't change at a given date or within a period of one year. At this point more has to be done. There are several alternatives usually - but they aren't infinite. The markets etc. provide nearly complete informations about the alternatives.

So lower boundaries and an upper boundaries can be identified. This means that we can do a look into the farer future by saying that the degressions of costs and the economies of scale will be between this upper boundary and that lower boundary.

In other words now there isn't an exact curvature anymore but a corridor between two curvatures. It's close to an estimation now but secure present informations and data are used.

But after two decades the corridor between the two curvatures will be too wide - then a first step into estimation has to be done.



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Post    Posted on: Mon Jun 27, 2005 11:04 am
To make the corridor narrower again the optimal method is to include other factors involved too in reality.

One of these factors is demand.

One of the papers Collins refers to in his answer to me is the paper titled "A Common Cost Target of Space Transportation for Space Tourism and Space Energy Development" dating from July 1997. It includes the following issue:

Quote:
However, an important question included in preliminary market research for space
tourism has wakened people from this dream to the possibility of realizing their own
space travel (Ref. 5). That question was "How many months' salary would you be prepared
to save for a flight to near-Earth space?" The questionnaires were designed to give a
concept of space tourism as a personal service that customers can buy if they want, not
as a government service using taxpayers' money. As a result, more than half of those
who answered the questionnaires were willing to make a space flight costing more than
one month's salary. Considering the great difficulty in increasing the annual budget
for the government space program which is only 2000 yen per citizen in Japan (or about
1% of the average monthly salary), we conclude that this market research has been
successful in reminding people how much they really wish to participate in space
activities of their own, that is, space activities that cannot be carried out using
taxes.


A figure is added there.

This way demand is observed directly and can be used to make the corridor more narrow - production capacities never will be expanded beyond the demand the market or the supply side (companies) expect.

So demand is a constraint for the corridor. Other markets are such restricting factors too - markets for PCs, cars, beds, bread and the like.

Demand can be estimated like done in the quote above. It is a bottleneck - but it should be called a constraint in this context. In Economics there mostly is a target function and several constraint functions. Demand is a constraint function here while costs and prices are target functions. There is a special method to handle this - it's called Linear Programming. This method would result in a price and mostly is recommended for apllication by companies and their Sales department.

To make the corridor narrower Linear Programming isn't applied - all the functions would be used as equations simply. And so all the target and constraint functions form a system of equations simply - making the corridor as narrow as possible.

But only the first step into estimation is done currently - demand has been estimated by asking potential customers.

There has to be done more.



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Post    Posted on: Fri Jul 01, 2005 11:39 am
Companies react to demand as well as to their competitors. Reactions are decisions made by humans - and thus can't be described by functions, formulars and the like. Consequently they can't be calculated.

The only way out - business reports, business plans, statements to the public, articles about investments etc. Not only the current and actual ones - these are the most important only - but those of the past too. The past business reports etc. can be compared to what each company has done really and it is possible to relate it too to the economical situiation that time.

This way statistical data about the past can be evaluated and adjusted. Then stochastics can be applied to get expected values and - very important - the according variances and covariances required for regression analysises.

The variances and covariances are required to avoid extrapolation of the past - they too provide a corridor between worst case and best case. They are inserted into the cost functions and other functions - and then all the functions and equations are made parts of a system of equations and functions.

The result is an estimation - it is far away from being an extrapolation but includes around 80% to 90% of all the possible futures.

One very important aspect of such an estimation is that it is bound to a lot of "Ifs" which can't be seen in the functions, equations and numbers. For this reason each estimation is embedded in very much words.



Collins has applied a special version of estimation still to be described here.



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Post    Posted on: Fri Jul 15, 2005 12:10 pm
The way(s) of estimation described here up to now all look from the present into the future to find out what are the alternatives the things may go futurely and how probable each of these alternatives is - given the data known in the presence.

So no goal is behind these estimations - they could be called pure science.

But there may be a goal that is wanted to be achieved in the future. Then the estimations described up to now don't provide reasonable insights - because the question regarding a goal is "How probable is it that the goal is going to be achieved and what has to be done?" while question up to now was "Which alternatives are probable to become reality in the future and how probable is each of these alternatives?"

The goal shifts alle the probabilities in favor of that goal - and so the results of this estimation never can be compared to the result of the previously described estimations.

An estimation regarding success in achieving a goal first has to ask after the requirements and needs to be fulfilled for achieving the goal. So again the contents of the thread about costs as it is today - 15th of July 2005 - will be applied. This will be done similar to what has been described in this thread already - but reverse. The thread about costs went down from the customer to the flights, from the flights to the vehicles and propellants... It could go down further. In principle this means to go back throught steps of production - which might include the step of development too in the end.

In short - that thread partially goes from the future (customers buying tickets for spaceflights) to the presence (production of at least one vehicle required to be able to do spaceflights).

So the chain of steps is determined to a high degree. Based on this it can be concluded which ways the probability of success can be increased, which way provides the maximum achievable probability and that maximum probability itself. Then a decision can be done about struggling for that goal or to not struggle for it.

This is and estimation too. Prof. Collins and his colleages have gone that way - at the level of Political Economics, several countries, the whole world or even a single country. Their goal is space tourism but - as Collins said - there is a quite major goal behind it: new chances of full employment.

May be continued.

What questions to you have?



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Post    Posted on: Wed Jul 20, 2005 12:04 pm
One way that provides safe insight into the future has to be added - this way companies apply if they have to decide on wether to install larger capacity or not. If larger capacity will be installed they will realize economies of scale.

This way providing safe insight into the future is a quite simple one: the list of orders. The orders are demand - and they are accepted contracts to be fulfilled. This list determines the amount of units of product to be produced.

Given a certain amount ordered or a certain amount of orders in the list no company can produce the whole amount ordered at once or in parallel. In that case the list of orders tells the company as well as the Economists who long into the future costs will be covered and what amount of costs will be covered. This is safe insight into the future - no stochastics and statistical uncertainties are involved but the risk only that a customer may decide to cancel his order - which is a market uncertainty but no statistical one.

The list of orders may reach into a future of two years in the case of well running businesses.

This is a good base for calculations as Dinkin et al. have done in the document Andy Hill has found. But this list is involved also in Collins' estimation(s) because the number of vehicles, engines etc. he speaks about means orders to other companies. From the number of vehicles to be in service in 2030 the lists of orders before that year can be derived until much closer to the presence. ...



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Post    Posted on: Wed Aug 24, 2005 1:04 pm
To clarify some terms and provide a short description of a special insturment for estimations - there are two kinds of numbers used in Economics.

The first kind of numbers are key numbers. Key numbers are describing a present state and can be used for time rows. Key numbers in Enterprise Economics are the capital-to-credits-ratio, return-on-capital, return-on-revenue for example - key numbers in Political Economics are the terms-of-trade and the inflation rate for example.

Such key numbers can be used for decision support, controlling etc. but NOT for estimations and prognosting purposes.

The second kind of numbers are indicators. Indicators can be simple amounts of orders, liquidity, storage and the like but they can look like key numbers too. I don't know any indicators in Enterprise Economics but in Political Economics there are indicators like the Earlybird for boom and business cycle, change of capacity exhaustion, consumption rate.

In principle each economic number or economical relevant number can be used as indicator - an indicator doesn't need to say something about the future but can be used to get an idea about another region, another but similar product and the like. It's called a reference number often then.

Such indicators are a kind of warning or alert calling for having a more detailed look to something to find out what's the matter really. They can be approximations or used to get approximations. Also they can be simple upper or lower boundaries.

...



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Post    Posted on: Sat Oct 15, 2005 11:57 am
Some posts ago I said that upper and lower boundaries can be identified and used. Thos boundaries can be got by looking at the investments of the companies and to the markets.

In another post previous to that post I said that engineers are asked when required - which Prof. Collins and his colleages have done.

I missed to explain that this way upper and lower boundaries are got too. The informations which can be got from engineers can be got from their journals also - and this is a way very often used.

Students of Economics in Germany have to choose special subdisicplines to focus their studies at and to be examined in - beides two sub-disciplines they can't avoid. Students of Enterprise Economics must chosse three sub-disciplines while students of Political Economics can choose only one sub-discipline and have two additional sub-disciplines they can't avoid.

Some of the students concentrate their studies on traffic and even avaiation thius way - for example. Those students who concentrate on economics of aviation read aviation journals engineers read too. They are used to do science and to anylse costs, economies of scale, traffic structure and much more. This can be the case in traffic science as well as in theory of competition and economic politics.

A few of these students later write a dissertations on avaiation economics and quote aviation journals for estimating the future costs, capacities etc. of the aviation branch.

So estimations use formulars of engineering to find boundaries the future will be between.



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