Carriers provide transportation services by moving cargo and passengers from one location to another. They utilize resources like vehicles, fuel, infrastructure, labor, and terminals. Their output is measured in ton-miles and passenger-miles. Costs for carriers include fixed costs and variable costs that make up their short-run and long-run total costs. Economies of scale exist when costs increase by a smaller percentage than the increase in output. Diseconomies of scale occur when costs rise more than output. Unit costs for multiple service carriers are calculated using long-run average incremental total costs.

1. Carriers- Output, Cost and
Pricing
1

2. Introduction
What does carrier mean?
A carrier is a firm that provides a transportation service
– moving cargo and/or passengers from one location to
another.
Who are the carriers?
Carrying units Shipping lines and barge carriers, truck
carriers and railroad other than power units(tug boats,
locomotives, tractors)
How does carrier firm differ from
manufacturing firm?
a tangible output and an intangible output.
Product at a given location and service that involves
changes in locations.
Homogeneous and heterogeneous
2

3. Resources
The resources utilized by carriers
(1) vehicles of various sizes: carrying units and power
units (2) energy: Petroleum fuel power, electricity, (3)
way: water, land, and air area, (4) labour, and (5)
terminals (Dedicated terminal and common user
terminal)
Quality of their service, the measurement of the service
output of carriers, and carrier cost characteristics,
pricing, and objectives will be discussed.
The theory is applicable to any type of carrier that
moves cargo and/or passengers to and from ports.
The efficiency of a port affects the size of ships that call
at the port.
3

4. Operating options
These operating options include
Speed of movement –Greater the speed the
higher the quality of service.
Frequency of service
Reliability of service rather than variability
Spatial accessibility of service, and
Susceptibility of cargo to loss and damage and
passengers to fatal and nonfatal injuries.
Environment of the carrying-unit vehicle.
Change in the level of operating options
4

5. Output
Ton-miles and passenger-miles of service.
They can also be the same for the same type of cargo
and the same type of passenger but for different
distances, tonnage, and numbers of passengers.
The rationale for using the ton-mile and passenger-mile
as measures of service outputs for cargo and passenger
carriers is as follows.
In order for cargo transportation service to occur, two
parties must be in agreement.
In order for passenger transportation service to occur,
the passenger must be willing to provide himself to be
transported and the passenger carrier must be willing to
transport the passenger (thereby incurring vehicle
miles).
5

6. Cost
Cost efficiency
Costs can vary with respect to time.
Short run cost
A carrier’s short-run total cost consists of fixed (including
depreciation and insurance)and variable costs.
6

7. Short run variable cost is measured vertically
from the horizontal axis
7

8. Short run Unit Cost
8

9. Long run Total Cost
9

10. Long run Average Total Cost and Marginal cost
10

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. LATC curve rising continuously as service expands –if output
increases by a certain percentage, the carrier Long run costs will
increase by larger percentage.
12

13. Constant Return to Scale
13

14. Type of Returns to Scale
The type of returns to scale may also be
described by the ratio of LATC to LMC for a
given amount of output.
Notice that for a carrier exhibiting economies of
scale (see Figure 4.4a), LATC is greater than
LMC at a given output, i.e., S = LATC/LMC > 1.
In Figure 4.4b, LATC is less than LMC for the
carrier exhibiting diseconomies of scale, or S <
1.
In Figure 4.4c, LATC is equal to LMC for the
carrier exhibiting constant returns to scale, or S
= 1.
14

15. Cost
15

16. Long run cost: Multiple outputs
It has been implicitly assumed that the carrier provides
one type of service, e.g., ton-miles. Suppose the carrier
provides a freight service as well as a passenger
service, measured in ton-miles and passenger-miles,
respectively.
How would the carrier determine whether it exhibits
economies or diseconomies of scale or constant returns
to scale?
How would it determine the unit costs of each of the two
services?
16

17. Long run cost: Multiple outputs
Note that for a single-service carrier, S = LATC/LMC, may be
rewritten 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-miles
and Q2 may represent passenger-miles .
If S > 1, the two-service carrier exhibits economies of scale, i.e., if
the amounts of the two services are increased by the same
percentage, the long run costs incurred by the carrier will increase
by 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 same
percentage, the long-run costs incurred by the carrier will increase
by 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 result
in the same percentage increase in costs.
17

18. Long run cost: Multiple outputs
For 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 total
costs 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 also
included in LTC.
18

19. Long run cost: Multiple outputs
Unit costs for multiple output carriers can be found by
computing the long-run average incremental total costs
for the outputs.
For example, the long-run average incremental total
cost (LAITC1 or unit cost) for ton-miles of service Q1 is
the incremental (or addition to) cost incurred by the
carrier in providing ton-miles of service divided by
these ton-miles.
Specifically, the incremental cost of ton-miles of service is the cost
in providing both services minus the cost of only providing the
other type of service, i.e., passenger-miles of service Q2.
If LTC = f(Q1, Q2), then the incremental cost of ton miles of
service 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

20. 20

21. 21

22. 22

23. 23