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apping the vessels. This is very briefly the relationship between demand, supply and freight rates.

CHAPTER 5

Admire a small ship, but put your freight in a large one; for the larger the load, the greater will be the profit upon profit – Hesiod

5.0 Elasticity of demand

Fluctuations in freight rates have an effect in worlds demand for goods, commodities and raw materials. The volume of that effect varies from one good to another and depends on the elasticity of its demand. Elasticity measures the reaction of gross revenue and production caused by a swift in shipping freight rates.

As we have already mentioned, demand for shipping services is a derived demand depending on the need of the transferred bulk cargoes or finished goods. Through shipping transportation goods are moved to the areas where they are needed, in order to enter other stages of production or to fulfill demand for finished goods in the importing country.

When freight rates rise or fall, determinants of the elasticity drive demand in a positive or negative way. There are three main factors driving that change:

5.1 Consumer demand for the products made by using imported raw materials or imported final goods.

Through shipping transportation raw materials, commodities and final goods reach the source of their demand. If we assume that freight rates rise, which will lead to a rise in the price of the final goods, the equilibrium in the market of those goods will change. Higher prices will drag down the quantities demanded, which will slowly reduce the quantities produced. Cutting down production, results in shrinking the imports. The amount of that reduction depends on the elasticity of demand of the final goods imported or the goods produced with the use of the imported raw materials.

More elastic demand for final goods, commodities or raw materials will lead to an elastic transportation service which will be affected from the rise in freights. On the other hand, if the elasticity of the final goods is inelastic, as in the case of using raw materials for production of commodities, the demand for sea transportation services will remain the same, not taking into account the rise of freight prices.

5.2 The cost of sea transportation as a percentage to the market price of goods carried or produced with the carried materials.

The final price of a product is a proportion of different costs which are added during the production procedure. The cost of sea transportation is one part of the total cost which sometimes is formed, even before the procedure of production begins. A relatively small proportion on the final price, will lead to an inelastic transportation demand. On the other hand, if the cost of transportation plays a big role in the finals’ product price, then the demand for transport will be relatively elastic.

An increase on freight rates will affect the final price of a product more, if the cost of transportation is a big percentage of its total cost. As a result, by increasing freights, the price of the good will increase, resulting in a decrease in markets’ demand. As we have already mentioned a domino effect will take place, and production of goods will decrease driving down raw materials’ or commodities’ demand. In contrast, if the transportation cost is relatively low, increasing the freig