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  1. 1. Carriers- Output, Cost and Pricing 1
  2. 2. IntroductionWhat does carrier mean?A carrier is a firm that provides a transportation service– moving cargo and/or passengers from one location toanother.Who are the carriers?Carrying units Shipping lines and barge carriers, truckcarriers and railroad other than power units(tug boats,locomotives, tractors)How does carrier firm differ frommanufacturing firm?a tangible output and an intangible output.Product at a given location and service that involveschanges in locations.Homogeneous and heterogeneous 2
  3. 3. ResourcesThe resources utilized by carriers(1) vehicles of various sizes: carrying units and powerunits (2) energy: Petroleum fuel power, electricity, (3)way: water, land, and air area, (4) labour, and (5)terminals (Dedicated terminal and common userterminal)Quality of their service, the measurement of the serviceoutput of carriers, and carrier cost characteristics,pricing, and objectives will be discussed.The theory is applicable to any type of carrier thatmoves cargo and/or passengers to and from ports.The efficiency of a port affects the size of ships that callat the port. 3
  4. 4. Operating optionsThese operating options includeSpeed of movement –Greater the speed thehigher the quality of service.Frequency of serviceReliability of service rather than variabilitySpatial accessibility of service, andSusceptibility of cargo to loss and damage andpassengers to fatal and nonfatal injuries.Environment of the carrying-unit vehicle.Change in the level of operating options 4
  5. 5. OutputTon-miles and passenger-miles of service.They can also be the same for the same type of cargoand the same type of passenger but for differentdistances, tonnage, and numbers of passengers.The rationale for using the ton-mile and passenger-mileas measures of service outputs for cargo and passengercarriers is as follows.In order for cargo transportation service to occur, twoparties must be in agreement.In order for passenger transportation service to occur,the passenger must be willing to provide himself to betransported and the passenger carrier must be willing totransport the passenger (thereby incurring vehiclemiles). 5
  6. 6. CostCost efficiencyCosts can vary with respect to time.Short run costA carrier’s short-run total cost consists of fixed (includingdepreciation and insurance)and variable costs. 6
  7. 7. Short run variable cost is measured vertically from the horizontal axis 7
  8. 8. Short run Unit Cost 8
  9. 9. Long run Total Cost 9
  10. 10. Long run Average Total Cost and Marginal cost 10
  11. 11. LATC curve falling continuously as service expands –if output increases by a certain percentage, the carrier Long run costs will increase by smaller percentage .How to achieve EoS? 11
  12. 12. LATC curve rising continuously as service expands –if outputincreases by a certain percentage, the carrier Long run costs will increase by larger percentage. 12
  13. 13. Constant Return to Scale 13
  14. 14. Type of Returns to ScaleThe type of returns to scale may also bedescribed by the ratio of LATC to LMC for agiven amount of output.Notice that for a carrier exhibiting economies ofscale (see Figure 4.4a), LATC is greater thanLMC at a given output, i.e., S = LATC/LMC > 1.In Figure 4.4b, LATC is less than LMC for thecarrier exhibiting diseconomies of scale, or S <1.In Figure 4.4c, LATC is equal to LMC for thecarrier exhibiting constant returns to scale, or S= 1. 14
  15. 15. Cost 15
  16. 16. Long run cost: Multiple outputsIt has been implicitly assumed that the carrier providesone type of service, e.g., ton-miles. Suppose the carrierprovides a freight service as well as a passengerservice, measured in ton-miles and passenger-miles,respectively.How would the carrier determine whether it exhibitseconomies or diseconomies of scale or constant returnsto scale?How would it determine the unit costs of each of the twoservices? 16
  17. 17. Long run cost: Multiple outputsNote that for a single-service carrier, S = LATC/LMC, may berewritten as S = (LTC/Q)/LMC = LTC/Q∗LMC.By analogy, S for the two-service carrier may be expressed as S =LTC/[Q1∗LMC1 + Q2∗LMC2], where Q1 may represent ton-milesand Q2 may represent passenger-miles .If S > 1, the two-service carrier exhibits economies of scale, i.e., ifthe amounts of the two services are increased by the samepercentage, the long run costs incurred by the carrier will increaseby a smaller percentage.If S < 1, the two-service carrier exhibits diseconomies of scale,i.e., if the amounts of the two services are increased by the samepercentage, the long-run costs incurred by the carrier will increaseby a larger percentage.If S = 1, the two-service carrier exhibits constant returns to scale;the percentage increase in the amounts of the services will resultin the same percentage increase in costs. 17
  18. 18. Long run cost: Multiple outputsFor a one-service carrier, its long-run unit costs (LATC)are found by dividing LTC by its corresponding quantity(Q).However, for a two-service carrier, its long-run totalcosts include costs that are incurred by both services,i.e., LTC/Q1 is not the unit cost of ton-miles of service,since the cost of passenger-miles of service is alsoincluded in LTC. 18
  19. 19. Long run cost: Multiple outputsUnit costs for multiple output carriers can be found bycomputing the long-run average incremental total costsfor the outputs.For example, the long-run average incremental totalcost (LAITC1 or unit cost) for ton-miles of service Q1 isthe incremental (or addition to) cost incurred by thecarrier in providing ton-miles of service divided bythese ton-miles.Specifically, the incremental cost of ton-miles of service is the costin providing both services minus the cost of only providing theother type of service, i.e., passenger-miles of service Q2.If LTC = f(Q1, Q2), then the incremental cost of ton miles ofservice Q1 is f(Q1, Q2) – f(0, Q2).Thus, LAITC1 = [f(Q1, Q2) – f(0, Q2)]/Q1.Similarly, LAITC2 = [f(Q1, Q2) – f(Q1, 0)]/Q2. 19
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