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1.0 OBJECTIVE 1.1 1.2 To explain the theory of perfect competition To explain the application of theory of perfect competition to bulk shipping.
INTRODUCTION 2.1 2.2 2.3 Bulk ships only sails when there is cargo booked for it. Cargo booking is by bidding process eg. at Baltic Exchange. Freight rate for the carriage of good is determine on the basis of the lowest offer made by the potential shipowner/carrier. Hence bulk ships operate following demand and supply,…. …..thus close to the condition of perfect competition,…. …..where the economic of certain commercial operation is not influenced by any other factors except demand and supply. Please note that the theory applicable to liners shipping is of non-perfect competition.
2.4 2.5 2.6
THEORIES ON PERFECT COMPETITION 3.1 There are few assumption for the industry/company to operate within a perfect competition environment, as folows….
fixed and variable. ….10 3..….second the long rub equilibrium. There can be two types of condition for perfect competition. ……and the short term average cost (SATC) and the short term marginal cost (SMC) are the same as those for non-perfect competition.16 3. that is it must be bulk and not bulk and liners combined….….sixth shipowners and shippers have perfect knowledge of the condition of the market..….….9 3. . ….13 3.…. namely….11 3.....15 3.…. The marginal revenue curve for perfect competition is a horizontal line at the price being charged.. The cost curves for the perfect competition is the same as those for non-perfect competition whereit comprises of two component.fourth there is no government interference in the market environment. ….3.first there is large number of sellers ( shipowners) and buyers (shippers)…… …..Non-perfect competition maximise profit by obtaining additional profit from the next quantity sold.4 3.17 …. …..third there is free entry and exit of firms within the market..6 3.fifth there is perfect mobility of factor of production. For the short run equilibrium the firm is in perfect competition when is capable of maximising profit given by total revenue (TR) minus total cost (TC).as compared to a bell shape of R against Q for nonperfect competition where is complies with the idea of marginal revenue...…… …..7 3.second the cargo is homogeneous. ….. ….8 3. ….0) with a positive gradient.14 3.5 3...3 3.2 3. …...12 3.. Please note from previous lecture that the plot of cost and revenue ( R ) with quantity ( Q ) is a straight line through (0.first the short run equilibrium.
22 …. as below .21 For the long run equilibrium the shape of the curves are the same as for short run. 3. 3.18 …. 3.20 The shaded area is the maximised profit when the firm is in equilibrium.19 The plot for MR and MC for perfect competition is as follows: 3...but the long run average cost LATC curves is enveloping many SATC curves.where SMC cuts SATC at the later’s miniumum point.3.….
3.3.and finally comes to an equilibrium point where the firm is actually operating at the bottom of the LATC and LMC. In the short run demand is inelastic.0 DEMAND CHARACTERISTIC OF BULK SHIPPING 4. 4.23 Note that free entry in the long run environment allows increase of production affecting the SATC. 3..3 4.24 ….…. 3.….….thus shifting the supply curve to the right... The shape of demand curve in bulk shipping (oil market) is as follows. 3.27 At this point the price is at P where the P line is horizontal and tangential to the minimum point of LAC. ……that is change in price will have no significant effect to the quantity demanded..25 Price will also fall.5 Demand for bulk shipping is actually coming from major oil company.2 4.1 4.26 …. . The main reason for inelasticity is due to no real substitute for bulk shipping..4 4.
When there is an excess in demand.16 4. ……while at the same time demand has actually relatively shrinked.8 4.6 4. Within each region price may move without setting off short term future price expectation. and thus shifted to the left. Then demand increase from g to h.22 4.….9 4..14 4.19 4. Depending on the severity of the ‘shock’ created by the demand curve the price will normally fluctuate between b and b’.24 4. (This for example may occur when shippers withdraw from the market).13 4. At any time the whole market may be. If the ‘shock’ is too great increase in price will result in the acquisition of new tonnage. requiring I number of ships.10 4.which is called the ‘cobweb’ demand curve. Too excessive demand can create shock just because shipowners ‘expect’ that there is excess profit. In reply supply curve also shift to the right.21 4. The critical point is at I where the supply curve is cutting the demand curve at its tips b and b’. R1 and R5 satisfy the normal demand curve requirement.15 4. It shown the impact of price elasticity to expactation.23 4. . Total collapse end at f.18 4.20 4.17 4. which is the lowest level of price. operating in one of the region.25 …. The situation becomes irreversible and demand moves down along the dotted path until total collapse of demand curve.11 4.7 4. in total. This thus shift the supply curve further to the right.4. The market will recover again step by step. R1 to R5 are series of different price regions.12 4. a straight line with a negative gradient.. First with the supply at g level corresponding to price f. the demand curve shift to the right.
4.27 Shipowners will become discourage and supply curve shift to the left and tonnage drops to k.29 This explain why rate for the carriage of bulk cargo fluctuates and the fluctuation is in a cyclical way.1 Bulk shipping operates according to demand and supply. 5.3 Fluctuation in rate for the carriage of bulk cargo is at its extreme when the market totally collapsed. 5.26 Excess supply will force price to fall to j. 4.4.2 The exact demand curve is ‘cobweb’ type.0 CLOSING 5. . 4.28 The same process will repeat as before until total collapse again. 5.