A supply function represents the relationship between the price of a service and the quantity of the service that service providers are willing to supply during a specific time frame. This function reflects various economic and operational factors that influence the capacity to provide service and can be expressed as:
Qλ = f (Pλ, Ps1…Psn, Pc1…Pcn, Po, Τe, g )
Whereas:
- Qλ = Supply of the port service λ
- Pλ= Price of the port service λ
- Pc1..Pcn = Price of the complementary services of the port
- Ps1…Psn = The price of the substitute services of the service λ
- Po = Price of the factors of production used to produce the service
- Te = Technology
- g = Objectives of the port service provider
Objectives of the Service provider
The relationship between the price of transport services (Pλ) and the supply of port services depends significantly on the objectives of the service provider. The supply response to price changes differs depending on whether the provider aims to maximize profit or operates under a public service framework: Cargo handling and related port services in seaports serving international trade and broader hinterlands and forelands fall in the first of these categories, irrespective of whether the port service provider is a private terminal operator or a publicly owned or hybrid entity. Exceptions in these cases are few. In secondary or smaller ports, the scale of provided services is determined differently. Typically, a government-owned port serving an island or remote community may continue to provide services even at a loss to promote local industries or connect remote regions with economic centres. An illustrative example is ports serving island communities. In absolute numbers, the ports of the second category outnumber those of the former. However, he vast majority of the world cargo throughput is today handled by ports where services are offered by ports where the quantity of the services.
Price of the Factors of Production
The price of the factors of production (capital, labor, land, and technology) plays a crucial role in linking the supply function with the production function for port services. Changes in these input costs directly affect profitability and, in turn, the supply of transport services. When the price of any production factor increases, higher input costs reduce the expected profits from offering port services. To maintain profitability, service providers may reduce the quantity of services they offer. For each port service selling price, a rise in the production factor costs reduces supply, shifting the supply curve to the left. Conversely, decreasing factor prices lowers production costs, increases potential profits, and shifts the supply curve to the right, leading to greater supply.
The impact of each factor on supply depends on how intensively the production factor is used in the service production process. This intensity is measured by comparing the use of one factor to another:
- K/L Ratio (Capital-to-Labor Ratio): Measures the intensity of capital relative to labor.
- K/T Ratio (Capital-to-Technology Ratio): Measures the intensity of capital relative to technology.
The more intensively a factor is used, the more sensitive the supply will be to changes in its price. For instance, if technology is the dominant input, the cost of technological improvements will have a greater impact.
Modern port service providers tend to shift toward capital-intensive and technology-intensive operations. This transition affects the relative importance of each factor. Ports are adopting more automation, machinery, and digital technologies, increasing the use of capital and technology and thus the K/L and K/T ratios. As capital and technology use increases, there is a corresponding decrease in labor intensity, particularly for unskilled labor. For example, automated container-handling systems reduce the need for labor. Today’s high-capital ports are more sensitive to changes in capital costs (e.g., interest rates on loans for infrastructure), rather than labor wages, while technological advances that reduce reliance on labor yet increase dependence on specialized technology, affect the supply curve differently.
Substitute and complementary services
The prices of substitute services and complementary services are crucial factors for the levels of supply of a port service. These interdependencies reflect the competitive and interconnected nature of port operations.
The presence (absence) and the price changes in substitutes affect the supply levels by a given provider. A substitute service is an alternative that can replace the port service in question. A cargo handling service at a neighboring port or a second or service provider at an alternative terminal within the same port are such substitute services. If a competing service becomes more expensive (e.g., cargo handling at a nearby port becomes more expensive), the demand for similar services at the current port increases, prompting providers to expand their supply. If substitutes become cheaper (e.g., lower handling fees at another terminal), users may switch to those alternatives, decreasing service supply in the competing terminal. The absence of any alternative service is not rare in the port industries, due to either geographical characteristics or the selected port governance model. In these cases, the supply levels are defined by the market size and the captive users’ needs.
A port service, such as cargo handling, is not offered as a single service alone, but is bundled and used with a group of other complementary services. Several services are offered to seagoing vessels, including nautical-technical services (e.g., pilotage, towage, mooring) and utilities (waste management, water, electricity, etc.). The cargo reaching a port will need temporary storage, and further services (i.e. customs clearance, inland transport) to be forwarded to the hinterland, and perhaps value-added services and logistics. The same applies to passenger ports, as passengers will seek ways to move from (to) the port to (from) their landside destination. Most of these services are interconnected. Independent services are rare due to the operational linkages (e.g., cargo handling depends on complementary services like storage and transportation, infrastructure sharing, with many services sharing physical assets (e.g., cranes, terminals), and customer needs, as shippers require seamless service bundles rather than isolated services. This interdependence means that changes in one service often affect the supply of others.
The supply levels of a particular service at a port are related to the price and quality of the complementary services offered in the given port: a more expensive and lower quality of a complementary service will lead to lower service levels and vice versa. Increasing the price of a complement increases the total cost for customers, thus decreasing the supply of a service. Conversely, if complements become more affordable, the combined service package becomes more attractive, prompting an increase in supply. For example, if the cost of trucking services from the port drops, more users may choose to use the port’s cargo handling, increasing the supply of handling services.