2. Transport Economics, Demand and Cost Structures

Introduction and Context

Transportation is often described as the movement of goods and people between locations. Economically, however, it is more than movement: it is a service that connects production, consumption, markets, suppliers and distribution channels. Transport decisions influence inventory, customer service, network design, market access, competitiveness and environmental performance. A logistics manager therefore needs to understand not only which mode is technically available, but also how demand is formed, how costs behave, how prices are established and how economic trade-offs affect the supply chain.

Transport demand is generally a derived demand. Firms do not usually demand road haulage, rail capacity or ocean freight for its own sake. They demand these services because products must be supplied to factories, warehouses, retailers or final customers. The level and pattern of freight demand consequently depend on industrial activity, trade flows, product characteristics, geography, service expectations and the design of the logistics network.

Transport economics provides tools for analysing these relationships. It explains why a shipment may move by rail rather than road, why consolidation can reduce unit cost, why a carrier may accept a backhaul at a lower price, why a small urgent shipment can cost more per unit than a full truckload, and why the lowest freight rate does not necessarily produce the lowest total logistics cost. This chapter develops these ideas through demand analysis, elasticity, economies of scale and density, cost structures, tariffs, cost-to-serve, externalities and pricing principles.

Learning Objectives

After studying this chapter, the reader should be able to:

1. Explain the economic role of transportation and the meaning of derived demand.

2. Analyse freight demand using demand determinants and elasticity concepts.

3. Distinguish economies of scale, scope and density in transport operations.

4. Classify fixed, variable, joint, common and external costs.

5. Interpret transport tariffs, rate structures and cost-to-serve.

6. Apply pricing principles to transport and distribution decisions.

7. Evaluate environmental and social externalities in transport choices.

8. Use economic analysis in carrier selection, shipment consolidation and network decisions.

9. Recognise the limitations, ethical issues and risks associated with transport cost analysis.

Transportation as an Economic Service

A transport service creates place utility by making a product available where it is needed. It may also create time utility when delivery occurs at the required moment. These utilities have economic value because location and timing influence revenue, production continuity, inventory requirements and customer satisfaction.

The value of transport is not identical to its physical cost. A delayed delivery of a critical component may stop a production line and cause losses far greater than the freight charge. Conversely, rapid delivery of a low-value, non-urgent product may create an uneconomic logistics solution. The relevant question is therefore not simply, “What is the cheapest transport mode?” but, “What transport service provides the required outcome at the lowest total cost and acceptable risk?”

Transport choices involve trade-offs among cost, speed, reliability, capacity, flexibility, security, frequency and environmental impact. Air freight is normally fast and reliable for suitable lanes, but expensive and capacity-constrained. Ocean transport offers low unit cost for large international flows, but usually involves longer transit times and port-related uncertainty. Road transport offers network flexibility and door-to-door capability, while rail may be advantageous for high-volume, long-distance movements where terminal access is available. Pipelines provide continuous movement for particular commodities, but require substantial infrastructure and are relatively inflexible in the products they carry.

Freight Demand and the Logic of Derived Demand

Derived demand arises when demand for one service results from demand for another product or activity. Freight demand is derived from the need to move goods through a supply chain. Demand for consumer electronics may create demand for inbound components, inter-factory transfers, regional distribution and final delivery. If production or consumption declines, freight demand may decline even when transport prices have not changed.

Several factors shape freight demand:

• Economic activity: Industrial output, retail sales, construction and international trade generate freight flows.
• Commodity characteristics: Weight, volume, value, perishability, hazardousness and handling requirements influence mode and service choice.
• Geography: Distance, terrain, border crossings, port access and population concentration affect transport requirements.
• Supply-chain structure: Centralised production may increase long-haul transport, while decentralised facilities may reduce distance but increase inventory and facility costs.
• Customer expectations: Narrow delivery windows, visibility and same-day service increase demand for responsive transport.
• Price and income conditions: Freight volumes respond to the price of transport and to the level of economic activity.
• Regulation and infrastructure: Tolls, emission rules, driver-hour regulations, road quality and terminal capacity influence both cost and available capacity.

Freight demand has both a volume dimension and a service dimension. Two shippers may move the same number of tonnes but create very different transport demand because one requires temperature control, appointment delivery and real-time visibility while the other accepts flexible delivery.

Demand, Supply and Equilibrium

In a simplified market, transport demand represents the quantities shippers are willing to purchase at different prices, while transport supply represents the capacity carriers are willing to provide. The market rate is influenced by the interaction of these forces. Capacity shortages, seasonal peaks, fuel price increases or regulatory constraints may shift supply and raise rates. Weak demand, excess capacity or improved productivity may reduce rates.

Transport markets are rarely perfectly competitive. Differentiated services, long-term contracts, network advantages, information asymmetry and market concentration affect bargaining power. A carrier with scarce refrigerated capacity on a constrained lane may have stronger pricing power than a carrier offering standard dry-van capacity on a competitive lane.

Elasticity and Transport Decision-Making

Elasticity measures the responsiveness of one variable to a change in another. The price elasticity of demand for transport can be expressed as:

Price elasticity of demand = percentage change in quantity demanded ÷ percentage change in transport price

If demand falls substantially when price rises, demand is elastic. If demand changes only slightly, it is inelastic. Elasticity varies by commodity, distance, time horizon and available alternatives.

Transport demand is more likely to be elastic when:

• alternative modes or carriers are readily available;
• the shipment can be postponed or cancelled;
• transport is a significant proportion of product value;
• routing and production locations can be changed; or
• customers are highly price-sensitive.

Demand is more likely to be inelastic when the shipment is urgent, the product is essential, alternatives are unavailable, or transport cost is small relative to the value of the goods. In the short run, demand may be relatively inelastic because production and distribution arrangements cannot be changed quickly. Over the longer term, firms may redesign facilities, change suppliers, consolidate shipments or adopt another mode, making demand more elastic.

Cross-price elasticity measures how demand for one transport service responds to a change in the price of another. Road and rail may be substitutes on some corridors, whereas road and ocean are often complements in an international container movement. Income elasticity describes how freight demand changes with economic activity or income. Demand for luxury products and their associated logistics may be more income-sensitive than demand for basic necessities.

Elasticity has practical importance for pricing. A carrier serving a highly differentiated, time-critical service may be able to charge a premium without losing all demand. A carrier offering a standard service in a market with many substitutes must usually compete more strongly on price and efficiency.

Economies of Scale, Scope and Density

Transport costs do not rise in direct proportion to shipment volume. Three concepts are particularly important.

Economies of Scale

Economies of scale occur when average cost falls as the scale of operation increases. A larger vehicle, vessel or train can move more freight while some operating costs increase less than proportionately. A distribution centre may also spread management, information-system and security costs over a larger throughput. The average cost can be represented as:

Average cost = total cost ÷ quantity transported

Economies of scale are not unlimited. Larger vehicles may require specialised terminals, face access restrictions, experience longer loading times or operate with lower frequency. At very large scale, coordination complexity, congestion and diseconomies of scale may emerge.

Economies of Density

Economies of density occur when greater shipment concentration within a geographic area lowers the average cost of serving that area. A parcel carrier can reduce cost when many deliveries are located close together because route kilometres and empty travel per consignment decline. Density is therefore related to the spatial concentration of demand, not merely the size of the carrier.

Economies of Scope

Economies of scope occur when two or more services can be produced together at lower total cost than when produced separately. A logistics provider may use the same depot, information platform, fleet, sales force and management system to serve several product categories or customers. Shared back-office functions and coordinated line-haul movements can produce scope economies.

Economies of scope require operational compatibility. Combining hazardous goods, pharmaceuticals and general merchandise may create regulatory or handling conflicts. Scope can also become diseconomical if service requirements differ substantially or if complexity reduces reliability.

Consolidation and Utilisation

Consolidation combines several smaller shipments into a larger movement. It may reduce cost per unit by improving vehicle utilisation and spreading terminal and administrative costs. However, consolidation may increase handling, transit time, inventory in transit and the risk of damage. The economic decision depends on the value of these disadvantages relative to freight savings.

A vehicle moving at full physical capacity may still be poorly utilised if weight, volume, axle limits, loading sequence or delivery routes prevent efficient use. Effective analysis therefore considers weight utilisation, cube utilisation, kilometres, time, route structure and backhaul availability.

Understanding Transport Cost Structures

A transport cost structure describes how costs behave as activity changes. It is essential for budgeting, pricing, outsourcing and network design.

Fixed and Variable Costs

Fixed costs do not change immediately with the number of shipments or kilometres operated. Examples include vehicle ownership or leasing, insurance, depot rent, information systems, licences and some salaried management costs. Variable costs change with activity and may include fuel, tolls, tyres, maintenance related to usage, handling charges and driver hours.

The distinction depends on the time horizon. A vehicle lease may be fixed in the short term but avoidable in the long term. Driver labour may be fixed under a salaried arrangement but variable when purchased per trip. Managers should therefore identify the decision period and distinguish committed costs from avoidable costs.

A simple total-cost model is:

Total transport cost = fixed cost + (variable cost per kilometre × kilometres) + (variable cost per shipment × shipments) + accessorial costs

This model is useful for initial analysis but may not capture congestion, overtime, waiting, empty running, equipment repositioning, maintenance cycles or step costs.

Step and Joint Costs

Step costs remain stable over a range and then increase when additional capacity is required. Hiring another driver, opening a new cross-dock shift or leasing an additional vehicle can create a step increase. Joint costs arise when a single movement serves multiple shipments or products. Common line-haul cost on a consolidated route is difficult to assign precisely to one customer.

Cost allocation methods include weight-based allocation, volume-based allocation, distance-based allocation, activity-based costing and revenue-based allocation. No method is universally correct. The allocation basis should reflect resource consumption and the managerial purpose of the analysis.

Direct, Indirect and Opportunity Costs

Direct costs can be traced to a shipment or service, such as a special crane charge or dedicated vehicle. Indirect costs support multiple activities, such as dispatch supervision or software. Opportunity cost is the value of the best alternative use of a scarce resource. If a vehicle is assigned to a low-margin movement during a peak period, the opportunity cost may be the contribution forgone from a more valuable shipment.

Sunk costs should not normally influence a future decision because they have already been incurred and cannot be recovered. Confusing sunk costs with avoidable costs can lead to poor outsourcing or route decisions.

Tariffs, Rates and Pricing Principles

A transport tariff is a published or negotiated schedule of rates, rules and conditions. A freight rate is the price charged for a defined transport service. Rates may be quoted per shipment, pallet, kilogram, cubic metre, container, vehicle, kilometre or service period.

Transport pricing may include:

• a base rate for the principal movement;
• fuel or energy adjustments;
• tolls and regulatory charges;
• terminal, documentation and handling fees;
• detention, demurrage, storage or waiting charges;
• special equipment or temperature-control charges; and
• delivery-area or time-window surcharges.

A low base rate can therefore be misleading if accessorial charges are significant. Procurement should compare the expected all-in cost under realistic operating conditions.

Important pricing approaches include cost-plus pricing, market-based pricing, value-based pricing and differential pricing. Cost-plus pricing adds a margin to estimated cost and is simple, but may ignore customer value and competitive conditions. Market-based pricing reflects prevailing rates and capacity conditions. Value-based pricing charges according to the value of service to the customer, such as the cost avoided by preventing a production stoppage. Differential pricing offers different rates according to service level, shipment characteristics, lane, timing or customer commitment.

Yield management is relevant where capacity is perishable. An empty truck departure, an unused aircraft slot or an unfilled vessel position cannot be stored for later sale. A carrier may accept a lower contribution rate for a backhaul if the alternative is empty capacity, provided the movement covers its incremental and relevant opportunity costs.

Cost-to-Serve and Total Logistics Cost

Cost-to-serve analysis measures the resources required to serve a particular customer, order, product or channel. It extends beyond the freight invoice to include order processing, picking, packing, inventory, warehousing, delivery attempts, returns, claims, customer service and exception management.

A customer with large orders and predictable delivery may have a lower cost-to-serve than a smaller customer requiring frequent urgent deliveries, special labelling, narrow time windows and high return rates. Revenue alone is therefore an inadequate measure of account profitability.

A practical cost-to-serve process involves:

1. defining the customer, product or channel segment;

2. mapping the activities required to fulfil demand;

3. assigning resource costs to those activities;

4. identifying cost drivers such as orders, lines, pallets, kilometres and delivery attempts;

5. comparing service revenue with attributable and relevant costs; and

6. evaluating alternatives such as minimum order quantities, delivery frequency, consolidation or revised service terms.

Total logistics cost includes transport, inventory, warehousing, facilities, order processing, packaging, information systems, loss and damage, and the cost of stockouts or late delivery. Optimising one component in isolation can increase total cost. For example, moving from a central warehouse to multiple local warehouses may reduce outbound distance while increasing inventory and facility cost.

Externalities and Sustainable Transport Economics

An externality occurs when an activity imposes a cost or benefit on parties not directly involved in the transaction. Transport externalities include air pollution, greenhouse-gas emissions, noise, congestion, accidents, road damage and land-use effects. These costs may not appear in the carrier’s invoice or the shipper’s internal accounts, but they affect society.

The difference between private cost and social cost is important:

Social cost = private cost + external cost

Fuel taxes, road pricing, emission standards, congestion charges, carbon markets and vehicle restrictions are policy mechanisms intended to internalise some external costs. Their design raises questions of fairness, measurement, enforcement and competitiveness.

Sustainability analysis should not treat emissions as a simple justification for one mode in every situation. Load factor, routing, vehicle technology, energy source, empty running, distance and transhipment all matter. A well-utilised truck may compare favourably with a poorly utilised alternative. Firms should use consistent boundaries and metrics, such as emissions per tonne-kilometre, per shipment or per delivered unit, while recognising that these measures answer different questions.

An Analytical Framework for Transport Decisions

A robust transport decision can follow this sequence:

First, define the service requirement. Specify origin, destination, volume, weight, cube, frequency, delivery window, reliability, security and handling conditions.

Second, identify feasible alternatives. Consider modes, carriers, routes, consolidation options, shipment timing and internal versus outsourced operations.

Third, estimate relevant cost. Include fixed, variable, accessorial, inventory, handling, delay, damage, carbon and opportunity costs where relevant.

Fourth, assess demand and elasticity. Determine whether customers will accept slower service, minimum quantities, delivery surcharges or differentiated service levels.

Fifth, evaluate total value. Compare cost with revenue, customer value, risk reduction, resilience and strategic objectives.

Sixth, test sensitivity. Examine fuel prices, volume changes, delays, capacity shortages, exchange rates, tolls and regulatory changes.

Finally, monitor outcomes. Use indicators such as cost per shipment, cost per tonne-kilometre, vehicle utilisation, empty kilometres, on-time delivery, claims, emissions and contribution margin.

Illustrative Case: Redesigning Regional Distribution at Meridian Foods

Background

Meridian Foods, a fictional packaged-food manufacturer, supplied supermarkets from one national distribution centre. It offered next-day delivery to major customers, but demand had become more fragmented. Orders were smaller, delivery windows narrower and promotional peaks more frequent.

Situation and Problem

The company’s transport department proposed replacing its contracted regional trucking arrangement with a single low-rate carrier. The proposed rate was 8 percent below the current base rate. Finance supported the proposal, but operations warned that the new carrier used fewer regional depots and had limited experience with timed supermarket deliveries.

Analysis

A cost-to-serve study showed that the current arrangement generated higher base freight but fewer failed deliveries, lower waiting charges and better vehicle utilisation. The proposed carrier’s rate excluded delivery-window surcharges and additional handling at two customer groups. It also required more direct deliveries, reducing consolidation.

The analysis identified the following relevant effects:

• base freight would decline;
• accessorial and waiting costs would rise;
• smaller shipment volumes would reduce economies of scale;
• longer average delivery distances would increase fuel and emissions;
• lower delivery reliability could create retailer penalties and lost shelf availability; and
• a regional cross-dock option could improve density without requiring a fully decentralised network.

Approach and Solution

Meridian adopted a segmented model. High-volume supermarket lanes were assigned to a contracted full-load carrier. Smaller customers were served through a shared-user cross-dock twice weekly. Urgent promotional orders were priced separately rather than being absorbed into the standard rate. The company also introduced minimum order quantities for non-promotional deliveries and a scorecard covering all-in cost, on-time delivery, claims, empty kilometres and emissions.

Outcome

The solution did not produce the lowest base freight rate, but it reduced total cost-to-serve by improving consolidation and lowering delivery failures. It also made the cost of premium service visible to customers and allowed procurement to compare carriers using total landed distribution cost rather than headline price.

Learning Points

The case illustrates that a transport rate is not the same as total logistics cost. Economies of density depend on network design, not merely carrier size. Service differentiation can align price with customer value, while cost-to-serve analysis reveals the consequences of apparently attractive discounts.

Challenges, Risks and Common Errors

Transport analysis is vulnerable to inaccurate data. Mileage may exclude empty running, fuel surcharges may be applied inconsistently, and delivery records may not identify waiting or failed attempts. Managers may also allocate common costs arbitrarily, producing misleading customer profitability results.

Other common errors include:

• selecting a mode solely on quoted freight rate;
• treating all fixed costs as irrelevant in every decision;
• ignoring capacity opportunity cost during peak periods;
• assuming larger vehicles always reduce cost;
• overlooking inventory and handling consequences of consolidation;
• measuring sustainability only per vehicle rather than per delivered unit;
• using average cost when incremental cost is the relevant decision measure; and
• accepting historical tariffs without testing actual service requirements.

Economic models simplify reality. Demand may be uncertain, costs may be nonlinear, and service quality may be difficult to monetise. Sensitivity analysis and scenario planning are therefore necessary, particularly for strategic network decisions.

Governance, Ethics and Professional Responsibility

Pricing and contracting must comply with competition law, transport regulation, taxation requirements, safety rules, labour standards and environmental obligations. Buyers should avoid misleading comparisons that exclude mandatory charges or shift operational risk unfairly to small carriers. Carriers should disclose material surcharges and service limitations.

Ethical cost reduction must not depend on unsafe driving hours, unlawful employment practices, inadequate vehicle maintenance or concealment of environmental impacts. Procurement decisions should consider supplier financial health and resilience, since extreme rate pressure can encourage unsafe or unsustainable operations. Data used in cost-to-serve and pricing systems should be accurate, secure and governed so that customer information is not misused.

Digital Analytics and Emerging Developments

Transport management systems increasingly combine shipment orders, rate tables, GPS data, telematics, fuel prices and proof-of-delivery information. These systems support route costing, carrier comparison, dynamic tendering and exception analysis. Machine-learning tools can forecast demand, estimate arrival times and identify unusual accessorial charges, but their outputs depend on data quality and should remain subject to managerial review.

Digital freight marketplaces may improve visibility and match capacity with demand, while electronic documentation can reduce administrative cost. Dynamic pricing is becoming more feasible as real-time capacity and demand information improve. At the same time, algorithmic pricing can create transparency and competition concerns, particularly where market power is concentrated.

Current developments include alternative-fuel vehicles, electrification of urban delivery, automated freight handling, urban consolidation centres, collaborative transport networks and carbon accounting. Their economic viability depends on total lifecycle cost, infrastructure availability, utilisation, energy prices, regulation and residual-value risk. Technology should therefore be evaluated as part of the transport system rather than as an isolated equipment purchase.

Best Practices for Managers

Effective transport-economic management generally requires the following practices:

1. Define service requirements before requesting rates.

2. Compare all-in cost rather than base price alone.

3. Separate short-run incremental analysis from long-run strategic analysis.

4. Use cost-to-serve to understand customer and channel profitability.

5. Analyse weight, volume, time, distance and density together.

6. Include inventory, reliability, risk and externalities in major decisions.

7. Test assumptions through sensitivity and scenario analysis.

8. Use transparent, auditable cost-allocation rules.

9. Link pricing to service value and capacity conditions.

10. Monitor outcomes through financial, operational, customer and sustainability indicators.

Chapter Summary

Transport is an economic service that creates place and time utility and connects supply-chain activities. Freight demand is derived from production and consumption, and its volume and service requirements are shaped by economic activity, geography, commodity characteristics, network design and customer expectations. Elasticity explains how demand responds to price, income and alternative transport services.

Economies of scale reduce average cost through larger operating units, economies of density arise from concentrated flows, and economies of scope result from sharing resources across services. Transport costs include fixed, variable, joint, common, direct, indirect, opportunity and external costs. Tariffs must be examined through their complete rate structure, including accessorial charges and capacity conditions.

Cost-to-serve and total logistics cost provide a more reliable basis for decisions than freight price alone. Transport pricing may be cost-based, market-based, value-based or differentiated. Externalities require attention to social cost, emissions, congestion, safety and policy intervention. Sound managerial decisions combine economic analysis with service quality, resilience, ethics, regulation and sustainability. Digital systems and analytics improve visibility and forecasting, but their results depend on accurate data and responsible governance.

Key Terms

Derived demand: Demand for transport generated by the need to produce, distribute or consume another good or service.

Price elasticity of demand: The percentage response in transport quantity demanded to a percentage change in transport price.

Cross-price elasticity: The response of demand for one transport service to a change in the price of another service.

Economies of scale: Declining average cost as the scale of an operation increases.

Economies of density: Declining average cost resulting from greater concentration of shipments in a geographic area.

Economies of scope: Cost savings from producing or coordinating multiple services using shared resources.

Fixed cost: A cost that does not change immediately with activity within a relevant operating range.

Variable cost: A cost that changes with kilometres, shipments, hours or another activity driver.

Step cost: A cost that remains stable over a range and rises when additional capacity is needed.

Joint cost: A cost incurred for a movement or activity that serves more than one shipment, product or customer.

Opportunity cost: The value of the best alternative use of a scarce resource.

Sunk cost: A past cost that cannot be recovered and should not normally affect future decisions.

Tariff: A schedule of transport rates, rules, conditions and additional charges.

Accessorial charge: A fee for services or circumstances beyond the basic transport movement.

Cost-to-serve: The total resources required to serve a particular customer, product, order or channel.

Total logistics cost: The combined cost of transport, inventory, facilities, warehousing, processing, risk and related logistics activities.

Externality: A cost or benefit imposed on parties outside the direct market transaction.

Private cost: Cost borne directly by the firm or parties undertaking an activity.

Social cost: Private cost plus costs imposed on society, such as pollution or congestion.

Yield management: The practice of adjusting capacity allocation and prices to maximise returns from perishable transport capacity.

Review Questions

Short Answer Questions

1. Why is freight demand described as derived demand?

2. Distinguish economies of scale from economies of density.

3. What is the difference between a fixed cost and a variable cost in transport?

4. Define cost-to-serve and identify two of its cost drivers.

5. What is an externality in transport economics?

Long Answer Questions

1. Explain the major determinants of freight demand and discuss how they influence mode selection.

2. Analyse the roles of economies of scale, scope and density in transport and distribution management.

3. Explain the principal components of transport cost structures and their relevance to managerial decisions.

4. Compare cost-plus, market-based, value-based and differential transport pricing.

5. Discuss why total logistics cost is a more useful decision criterion than freight rate alone.

Analytical / Application Questions

1. A shipper can choose a low-rate weekly consolidated service or a higher-rate daily direct service. Develop a framework for comparing the alternatives using transport, inventory, stockout, handling and customer-service costs.

2. A carrier has spare capacity on a return journey. Explain the conditions under which accepting a low-rate backhaul is economically rational, and identify costs that should be considered.

3. A city introduces a congestion charge for delivery vehicles. Analyse how the policy could affect transport demand, routing, delivery schedules, pricing and the choice between centralised and urban distribution facilities.

22. Multiple Choice Questions with Answers

Question 1

Why is freight demand generally described as derived demand?

A. Because carriers determine all shipment volumes independently of customers

B. Because the demand for transport results from the need to move goods for production or consumption

C. Because freight prices are always derived from fuel prices

D. Because transport services can be stored for future use

Correct Answer: B. Because the demand for transport results from the need to move goods for production or consumption

Question 2

Which situation most clearly demonstrates economies of density?

A. A larger vessel spreads crew costs over more containers

B. A carrier uses one information system for several service lines

C. A parcel carrier serves many nearby customers on one route

D. A shipper changes from road to rail

Correct Answer: C. A parcel carrier serves many nearby customers on one route

Question 3

Which cost is most likely to be variable in the short run?

A. Depot rent

B. Vehicle insurance

C. Fuel consumed per kilometre

D. Annual software licence

Correct Answer: C. Fuel consumed per kilometre

Question 4

A carrier adds a second vehicle when demand exceeds the capacity of the first. This is an example of:

A. A sunk cost

B. A step cost

C. An external cost

D. A scope economy

Correct Answer: B. A step cost

Question 5

Which statement best describes cost-to-serve analysis?

A. It compares only the freight rates quoted by carriers

B. It measures the resources required to serve a customer, order, product or channel

C. It excludes order processing and returns because they are not transport costs

D. It assigns every customer the same average logistics cost

Correct Answer: B. It measures the resources required to serve a customer, order, product or channel

Question 6

A shipment is urgent, has no practical alternative mode and represents a small proportion of product value. Its transport demand is likely to be:

A. Highly elastic

B. Relatively inelastic

C. Perfectly elastic

D. Unrelated to price

Correct Answer: B. Relatively inelastic

Question 7

Which item is most likely to be an accessorial charge?

A. The basic line-haul rate

B. A fee for waiting beyond the agreed loading time

C. The value of the goods being transported

D. A customer’s sales revenue

Correct Answer: B. A fee for waiting beyond the agreed loading time

Question 8

What is the correct relationship between social and private transport cost?

A. Social cost equals private cost minus external cost

B. Social cost equals private cost plus external cost

C. Private cost always includes all pollution costs

D. Social cost excludes congestion and accidents

Correct Answer: B. Social cost equals private cost plus external cost

Question 9

A firm selects a carrier solely because its base rate is lowest, but later incurs high waiting, failed-delivery and handling charges. Which principle was most clearly neglected?

A. Comparison of all-in total logistics cost

B. The definition of fixed cost

C. Cross-price elasticity

D. The distinction between scale and scope

Correct Answer: A. Comparison of all-in total logistics cost

Question 10

Why might a carrier accept a low-priced backhaul movement?

A. The movement is profitable only if all fixed costs are ignored permanently

B. Unused return capacity is perishable and the rate may cover relevant incremental and opportunity costs

C. Backhaul shipments never require handling or fuel

D. A low rate always increases long-run profit

Correct Answer: B. Unused return capacity is perishable and the rate may cover relevant incremental and opportunity costs