LECTURE 8 TITLE : The Economic of International Shipping – Basic Economic Theory

1.0 OBJECTIVE. 1.1 To introduce some of the underlying knowledge in economic studies.

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INTRODUCTION 2.1 2.2 2.3 2.4 Shipping companies exist with the aim of making profit. It will operate along a line that will guaranty efficiency. It will be managed to maximise gain within the constraints. A liner company operate under conferences and liner ships sails although there is no cargo along the predetermined route. A bulk shipping company operates independently and its ships only sails when there is cargo to carry. Bulk shipping thus really operate on the basis of instantaneous demand and supply whereas liners are not. The following paragraphs will gives understanding on the basic theory in demand and supply prior to moving on to understanding the operational criteria demand and supply applicable to liner and bulk shipping.

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BASIC ECONIMIC TERMINOLOGY 3.1 The five basic terminology in economic studies are …. 3.2 …..demand and supply,….. 3.3 …..the theory of cost,…..

.0 SUPPLY .1 Demand starts from utility... 3.6 ….6 Demand is the rate of usefullness against quantity ( dU/dQ) and thus the gradient at points along the curve of utility..0 DEMAND AND SUPPLY.5 It then falls as he is given more and more of it and finally become useless to him . 4.8 A plot of dU/dQ against quantity is as follows: 4. 4.7 ….9 ….10 The company is of course using the demand curve derived when dU/dQ is above zero.the theory of production. ….….3.. 4. MC is marginal cost. AC is average cost and P and Q are price and quantity respectively.(refer to figure on MC. 4.. 4. 4. AC and MR).3 The degree of usefullness of a product to a consumer follows the pattern that it first increases after the first unit until a point where he enjoy the most..the theory of revenue.4 3.2 In this context utility is the usefullness of a certain product. 4.…. 3..11 The highest dU/dQ is the highest price that he is willing to pay and thus it is normally designated as P axis.(refer to figure on deman curve). 4.4 ….(refer to figure on utility line ).. 4.….8 MR is marginal revenue. 5. A shipping company in full swing is actually economically operating at a point that balance all the four components above.7 We will thus have positive demand until a point when the curve makes a turn downwards. 4.…. 4.5 3.

Curve of total cost (TC) is obtained from the summation of both these costs The short term average total cost curve (SATC) is total cost divided by quantity (TC/Q) for every Q.7 6. variable cost starts at (0. Producer response to the demand curve and thus start producing unit one of the product at origin (0.0) with a positive gradient.0 COST 6. On an axis of P against Q..(refer to figure on ATC curve).9 6..….10 6.13 6.5 6.0) and increases as q increases tracing an ‘s’ shaped curve.1 6. The short term average total cost curve is a ‘U’ (or ‘V’) shaped curve on P against Q plot. .(refer to plot on fixed and variable cost)…. Fixed cost is incurred even at no production and thus it starts at a non zero value. Fixed cost however is constant and does not change with production level.. …. Gradient at every Q on TC curve will give a plot of short term marginal cost (SMC).variable cost.4 6.3 6.1 5.(refer to figure on demand and supply ).14 Cost is of two components: …..2 6. and…..fixed cost.2 5. 6.….0) when demand is the highest. Marginal cost is the additional cost of producing next one unit of production.11 6. Note this is not a plot of gradient along the TC curve. …..12 6.5.4 5.6 6. the plot is a straight line from (0..6 Supply is actually a derived action of demand.8 6. …. Supply will continue until there is no demand.3 5. The intersection point is the equilibrium point where supply meets the demand.5 5. ….

8.5 7.…. 7. PXQ is also the area below the curve of D at that particular demand point. 6.8 7..(refer to MR plot). 6.6.0 REVENUE 7.17 When the two curves are plot together SMC curve will cut SATC at minimum point of the later. starting from where D starts on the P axis and end on the Q axis halfway between (0.7 7. The plot of MR is as follows: ….16 ….(refer to figure on PXQ).1 .1 7.2 7.(refer to figure on SMC)...15 The short term marginal cost is also a ‘U’ shaped curve. MR is the additional revenue from selling the next unit of production.…..9 Revenue is calculated from total of sale. revenue is thus PXQ. It is the revenue at Q now minus the revenue at Q one unit before. 8.so as the case for liner shipping company although the later is not operating in perfect competition market.4 7.6 7..4 Understanding on demand and supply and cost and revenue is thus very important in understanding the economic of shipping services. ….….0 CLOSING A shipping company will operate at a point where at least MR=MC.…. The MR plot is a straight line below he demand curve. 8. 8. From the plot of demand curve on P against Q.3 ….0) and where D cut the Q axis.2 A bulk shipping company operating close to perfect competition will operate within this point.3 7. 8.

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