Lecture 1: Introduction

No practices

Lecture 2: Shipping demand

In maritime transportation, the demand for shipping is usually measured by the actual volume of cargoes carried in a certain time period. As in the Figure 2-1, the total number of TEU lifts is used to calculate the annual growth rate of demand in the world. Explain the differences between the definition of demand in theory and this practical usage, and discuss the possible reasons for such a usage in real world.

Answer:Demand is the buyer’s desire, willingness and ability to pay a price for specific goods or services. It refers to how much (quantity) of a product or service is desired by buyers at certain price.

But the desire and willingness is not really easy to measure, the actual volume of cargoes carried in a certain time is the actual business happened it is practable to be used and it stands for the actual desire and willingness level in a certain way.
Compare the similarities and differences between consumer demand and profit-maximizing input demand, and discuss how market prices contributes to the decision making process of consumer and producer.Compare the difference between:
- a.Consumer demand and input demand
- b.Quantity demanded and demand
- c.Change in quantity demanded and demand shift
- d.Demand function and demand curve
  
  Answer:a.Consumer demand is the terminal market desire and willingness that consumes the upstream supply directly; the input demand is used for manufactory to produce in the next stage,which may not be consumed directly.
  
  Answer:b.Quantity demanded is the number of units the buyer wants at a price. it reflact the relationship between the price and the quantity.Demand is the desire itself, which reflact the actual needs of the buyers.
  
  Answer:c.Change in quantity demanded is the change that results from the change of the price.The demand shift not regarded as the change leaded by the price fluctuation but the new needs increase on the base of the existing demand.
  
  Answer:d.Demand function is the relationship between quantity demand and the price. The demand curve is the plot of demand function.
For the change in each of the following factors, identify and explain whether it will lead to change in quantity demanded, demand shift, or no impact on demand in shipping.
- a.Exchange rate change
- b.Oil price
- c.Natural disasters
- d.International relationship
- e.Cost reduction in cross continental freight rail
- f.Expansion of Panama Canal
  
  Answer:a.Exchange rate change will lead to the price change directly and this will result to a change in quantity demanded.
  
  Answer:b.Oil price will change the overall cost of the shipping which is easily lead to the change in the shipping price and this will result to a change in quantity demand.
  
  Answer:c.Natural disasters basicly will increase the needs of some place and also increase the difficulty of shippment,so it is quite comlicated to say,whether it will lead to a change in quantity or demand shift,or both.But it does have some effect on the demand of shipping.
  
  Answer:d.Market demand for shipping is the result of international commodity trade that uses sea transportation services. As the price of the shipping is only a small part of the commodity price is not very likey to lead to the quantity change but a demand shift.
  
  Answer:e.Cost reduction in cross continental freight rail is linked with the price directly the will lead to the change in quantity demand.
  
  Answer:f.Expansion of Panama Canal does not gain new production but the cost of long distance shippment so it will lead to a change in quantity demand.
For two ports serving the same hinterland or two carriers calling the same ports, they can be complements or substitutes. Explain the condition for them to be complements or substitutes.

Answer: Ports or carriers can offer differet kinds of service which maybe needed and when the cargoes increase the service are icreased at the same time, the services are consumed together in a certain way the demand increase in one will bring up the demand for the other.

At most time the ports or the carrier are in competition,they fight in the market for the market share,when one demand increase in one will reduce the demand for the other.
How to understand that the market demand for international shipping is inelastic in general, but the demand for individual shipping company may be very elastic?

Answer:Demand for shipping/port is derived demand that is to say people interested in the cargo, not the act of shipping itself. Maritime transportation cost is only a small part of the commodity price. so in the big picture the overall demand is depanded on the other industry,it is relatively stable.

But as the total demand is relatively stable,the competition is very intensed between the suppliers for the limited cargoes and market share.
What are the causes for business cycles, and how they affect the world economy and shipping market?

Answer:It is caused by the nature of business operation:

The multiplier and accelerator.The interplay among income, investment, employment and consumption

Time lag.The delays between economic decisions and their implementation.

Stockbuilding.Recession: Manufactures run down stocks, intensifying the downturn in demand for sea transport; Recovery: rush to build stocks, lead to a sudden burst in demand.

Mass psychology: non-compensated errors: When individual’s decision making is not independent, one decision maker’s pessimistic behavior will affect other players in the market.
The new US President, Donald J. Trump, will implement its policy to bring the fact ories back to US, and “buy American,hire American”. Please discuss how this will affect the demand for international trade, especially for liner shipping industry.

开放性问题

Calculation question

The demand for Teddy Bearat U.S. market is p=400-0.25q (p: the price; q: quantity of Teddy Bear). A toy producing company, Teddy Inc., is the only manufacturer in Hong Kong for this product. The cost function for producing Teddy Bear is C=0.2q^2+2q+10 (q: the number of Teddy Bears, cost in HK$). The shipping cost from HK to US West Coast Port (WP) is HK$4 each, to East Coast port (EP) is about HK$5 each.

There are two distribution centers in the US for this product, one for the west part of US (WDC), and the other for the east part(EDC). Each distribution center handles half of its national demand. The unit cost for rail transportation from each port to the center at the same side is $1, and $3 to the center at the other side. The port costs for one Teddy Bear are the same at two US ports, which is about HK$1.5 each. The port cost at Hong Kong is about HK$2 each. Assume each distribution center handles half of the national demand.

How many Teddy Bears to produce?
What is the total cost for so many Teddy Bears?
What is the demand for each Coastal ports?
What is the total profit the export company can earn?

Answer:利润profit=price×q-manufactory cost-distribution cost-shipping cost

第一问-profit=（400—0.25q）q-（0.2q^2+2q+10）-q-8q,求导数等于零的最大值时，q的值。

解出q，86就是第一个问的答案；

第二问-把q带入成本公式C1=0.2q^2+2q+10得到生产成本，加上运输和分销成本C2=（0.55+0.54+2+1.5+1）q，得到总成本。

生产成本1661，运输成本774，总成本2435

第三问-86/2=43

第四问-代入利润公式：profit==（400—0.25q）q-（0.2q^2+2q+10）-q-8q=30116

Lecture 3: Shipping supply

Assume there are 3 ship owners providing transportation services for crude oil in the market, each with different supply function as listed below:
- Ship owner 1: q1=10+0.3p
- Ship owner 2: q2=-50+0.6p
- Ship owner 3: q=-75+p
- A)Use a graph to show the supply function of the three ship owners.
- B)Write out the industry supply function
- C)Draw the industry supply function in another graph.
  
  Answer: A,画图像；
  
  Answer: B,把三个function公式叠加到一块；
  
  Answer: C,把上边的公式画图像。
Explain the important factors affecting market supply and individual supply in maritime transportation?
World shipping capacity is the best measure for shipping supply. Capacity changes with new order/demolition. Shipping supply changes with many other factors.
- The capital and financial costs of its fleet.
- Input costs: fuel, labor
- Second-hand market, Chartering market, demolition market
- Cooperative agreement – Liner services used to operate in conferences, consortia, etc, that have high market power. – In the 80s-90s, anti-trust/competition laws in USA and EU have banned their rate setting behaviors. – Now, only the VSA are allowed, depended on the approvals.
How to measure ship productivity? What are the major factors affecting ship productivity, and how?
What is the relationship between new building price and freight rate? Is new building demand sensitive to the price of new ships?
If a shipowner’s variablecost functionisC(q)=0.08q2, where q is the number of TEUs carried in a trip. When the market freight rate is $1600 per TEU, what is the optimal quantity the shipshould carry in that trip? What arethe total revenue, total cost, and profit for this trip?
The figure in the next page shows the short run marginal cost curve (SMC), average total cost function (ATC) and average variable cost function of one ship. There are three possible freight rates marked p1,p2, and p3. Please identify the best strategy of the ship owner at these three different freight rates. For each of the freight rate, please identify
- (a) whether the ship owner can make positive profit,
- (b) whether the ship owner want to layup the ship temporally.

Lecture 4: Market behavior

The State council decided to build Shanghai into an International Shipping Center, and build a tower called “International Ocean Shipping & Finance Center”(上海國際航運金融大廈) in Pudong, Shanghai in 1996.It is supposed to become a market place for the transactions in the international shipping. However, most of the spaces are used as offices, hotel and tourism sites. Pleaseexplain the problems in the original purpose of this building, and what kinds of transactions need a market place like this?
How to understand that the invisible hand in free market economic system can ensure the efficient resource allocation among buyers/consumers?
What is the impact of a sales tax on certain product on the market transaction of this product?
- For example, the demand and supply of shipping services for domestic shipping companies is shown in the figure below. Now assume that the government is considering imposing a sales tax of dollars on every unit shipped. What is impact on the equilibrium price and quantity, the consumer surplus, producer surplus, and the change in total social welfare?
Continue with questionabove, assuming that the market for shipping services is open to the shipping companies from other countries. Therefore, the demand for the domestic shipping services is very sensitive to the price change, due to the high competition. What are the impacts to the market equilibrium price, quantity, and the social welfare for the country for the proposed sales tax?
What is the impact of import tax on the social welfare of the importing country? Assume the domestic demand and supply for a certain consumer goods is Qdand Qs(as shown in the next figure), then the domestic equilibrium price and quantity of transaction for such goods are Pand Q. If the world price for such goods is only Pw, then the domestic price is much higher than the world price. What is the social welfare increase iffree trade is allowed? Then, if the government want to put a tax on every unit imported, what will be the new price in the domestic market, and what is the social welfare loss compared with no import tax?
It is usually claimed in international shipping that the demand for shipping is not sensitive to the changes in shipping price. However, the supply is usually considered elastic due to the profit maximizing behavior. To increase shipping supply, the usual method is to build more ships. As it take time to build a ship, the supply changes after observed the market prices. Using a graph to explain the possible reasons why the freight rate in shipping market does not converge to stable market equilibrium.
On January 29, 2015, the BDI index dropped to around 600 points, a 30-year low level. What are the possible reasons for such a low market index? Using a market model to explain the reasons you suggested.

Lecture 5: Market structure and firm behavior

No practices

Lecture 6: Risk and uncertainty in shipping

The price for a 5-year-old capesize bulk ship is about $40 million, while the new order price for similar ships is about $54 million. Explain possible reasons for those who purchase the second-hand rather than the order new, and those who order new rather than purchase the 5-year-old?

Lecture 7: Relationship between different market segments in shipping industry

Describe the relationship between shipping freight rate, price of new order and second hand price.
Discuss the pros and cons for invest in new or second hand ships in booming or sluggish market. How can the researchin shipping markethelp the investors to make better decision on ship investment?
Brainstorming on the possible reasons for the different lead-lag relationshipsin the new building price and second-hand price? How this information can be used to improve the decision making on ship investment?
In the graph below, the dotted line is the long term average freight rate from 1976 to 2012. Using basic economic theory, explain why the freight rate can be almost horizontal in such a long time period? What are the main factors that resulted in the very high freight rate from 2003 to 2008? What is your expectation on the freight rate in the bulk shipping market after 2012? Does your expectation confirm with the real market situation?

Lecture 8: Decision making in ship investment

Assume that the operating cost of capsize (180KDWT) is about $5,600/day, and the scrapping price is about $9 million.
- A) If the price of new ship is $97million, and the financing rate is 1%;
- B) If the price is $20million, and the financing rate is 5%;
- What is the RFR for these two cases?
MOL ordered six 20,150 TEU container vessels at March 2, 2015, each costs $155 million.
- Although the container market looks better than the drybulkmarket, the global trade does not give a promising signal for rebound.
- Discuss the possible rationale for MOL to order such a big capacity under current market trend.
A new containership of 3500TEU cost $45.6 million in 2011. Assuming that the daily operation cost is $8,040, C&F cost is $7,496 (depreciation included), 25 year lifespan, no terminal value and 5% discount rate, what is the required daily charter rate?

涉及到考察海运的数据的假设，比如一年运行多少天，这方面考试不做考察。

Lecture 9: Environmental Issues in Shipping

The liner shipping and bulk shipping sectors have different MACC. Assume that the MACC for bulk sector is Cb=3q, and that for liner sector is Cc=2q, where qis the units of reduction. Further assume that each sector is required to reduce 100 units of emission, emission permits are tradable in the market, and there is no transaction cost, please identify which sector will be the buyer, the number of units will be traded, and the equilibrium price and quantity for each sector. What is the benefit of having emission trading scheme?

答案：

The bulk sector would be the buyer.

3(100-q)=2(100+q)得到q=20

price-3(100-20)=240

the quantity,liner:80,bulk:120

before the trade the cost is C=3100100+2100100=50000

after the trade the cost is C=38080+2120120=48000

the benefit of having emission trading scheme is 50000-48000=2000.

海运市场与经济