Business Case

Answer 1: We treat the supertanker industry as a competitive industry because it meets major characteristics of the perfect competition:- (a) For the supertanker industry, there are many independent buyers and sellers. In addition, no one can exert an effect on determining the market price. (b) All the supertankers provide homogeneous service as transporting crude oil. (c) Information for the supertankers is well known by buyers and sellers in the market. (d) No transaction cost (such as searching cost or commission fee) is required. (e) Supertankers no need to bear any costs (e.g. license fee) for entering or exiting the supertanker industry. You can enter the market by acquiring a supertanker; and leave the market by selling it to a salvage yard for scrap.

Answer 2: In the early 1970s, the industry was expected to grow continuously. Increase in demand of supertankers led to an increasing order of new ships, which the market price were trended to shift towards the long run equilibrium price P* (i.e. all firms in the industry earn zero economic profits and receive just enough to cover the average cost of production).

However, the closing of Suez Canal and the OPEC crisis broke out. Starting from mid-1973, therefore, the demand curve shifted leftward from D0 to D1. Because of the inelastic short-run supply, the shipping rate dropped from over 400 to 70. During 1975, worse still, many new ships (which were ordered during early 1970s) launched, which caused the short run supply curve shifting from S SR0 to S SR1. As a result, the shipping rate decreased to the intersection of D1 and S SR1.

In the late 1970s, the tanker supply declined as a large number of tankers were sold and the orders for unfinished tankers were cancelled. Hence, the decline in supply (the supply curve shifting to the left) and revival of demand (the demand curve shifting to the right) would eventually increase the shipping rate until the long run equilibrium price equals P*.

Answer 3:- The demand for bulk carrier, containership increased as they were used to ship the goods around the world. Since oil is the fuel for carriers and containerships, the demand for oil increased.

This led to a rising demand in supertankers for transporting oil.; Therefore, the demand curve of supertankers shifted rightward from D0 to D1 as shown in Graph (3).

As the substandard supertankers were eliminated, the supply of supertankers decreased slightly from S0 to S1. A shortage in supertankers (Pe) existed, which caused consumers were willing to pay more to purchase supertankers. As a result, the price equilibrium in Graph (3) would rise drastically from Pe to P1.

In order to produce newer and safer tankers, a rising demand in steel would be resulted. The demand curve of steel would shift rightward from D0 to D1 as shown in Graph (4). Given that there was a shortage in the steel market, the equilibrium price