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Oyster cards - You have been hired as an economist to advise the GLA on this issue. What would be your advice to the GLA? Explain and illustrate your reasoning.

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You have been hired as an economist to advise the GLA on this issue. What would be your advice to the GLA? Explain and illustrate your reasoning. Introduction to Economic Analysis Introduction: The Greater London Authority is considering reducing the fares on buses and the tubes for Oyster card users in 2006. Passengers using Oyster cards will face a decrease in the tube fares whereas the bus fares will be frozen at previous prices. According to the Mayor the motive behind this policy is to encourage passengers to use more of Oyster cards, because it is "the best value fare for their journey". Mr Ken Livingstone argues that the use of Oyster cards will be beneficial because it is expected to speed up the journey therefore saves time. In addition improve the competence of the public transport system compare to other private means of transport. This policy will not only affect customers but also the GLA itself. The reduction in fares is expected to increase demand for this product. Depending on the proportion changes in demand this will affect revenue for the GLA from Oyster card users. This essay is structured as follows; firstly the benefits of Oyster card will be discussed, highlighting its advantages opposed to other means of private transport. Secondly the implication of the proposed strategy for GLA and third part is going to be a comparison between Oyster fare and other private means of transport. ...read more.


In the example above one can observe when demand is elastic a small change in price will lead to a big change in the quantity demanded. Customers will save 20p, when price changes from �1.70 to �1.50 and therefore quantity demanded for Oyster will go up from 100 to 200 leading to an increase in revenue for the GLA from �170 to �300 almost double the revenue earned previously. Previous Oyster fare: Oyster fare Quantity GLA'S Revenue �1.70 X 100 = �170 New Oyster fare: Oyster fare Quantity GLA'S Revenue �1.50 X 120 = �180 The diagram 2 and the example above illustrate what happens to the quantity demanded when the demand is inelastic. If demand is inelastic, then a small change in the Oyster fares from �1.70 to �1.50 will cause a small change in the quantity demanded from 100 to 120 Oyster cards. This will raise only 10% more revenue, for instance from �170 to �180 there is only �10 extra. Therefore GLA needs to create a situation, which is likely to going to lead to elastic demand for Oyster in the market as it is favourable for the GLA and that will raise them almost twice the revenue made with previous Oyster fares. As an economist I would advice the GLA to consider the responsiveness of demand to price changes and should be able to attract customers away from other private means of transport and substitutes, for instance a recent mean to attract customers ...read more.


Therefore I would advice GLA that before this problem takes place again and because it was due to the fault in card reader so people may start losing their trust on Oyster. I would advice GLA that an adequate part of the revenue generated by the implementation of this strategy must be spent on the for efficient Oyster network. Security is another reason for, which people prefer public transport over private transport. Therefore attention must be paid to security features on public transport too. Another issue concerning Oyster its limited use does not include rail journeys "rail companies' refusal to embrace pre pay means more than 1.5 million commuters face higher cost" (TheLondoners, 2005). Train companies don't accept pre pay Oyster card therefore people travelling by rail have to buy a separate ticket for rail journey. This can not neglected as over a million people are affected by this. They are losing money on trains and it is not the best fare for them. This may lead discouragement and therefore a decrease in demand for Oyster. As an economist I would advise GLA to increase the awareness of the savings Oyster offers and its highly differentiated features to increase demand for it. GLA should review their marketing strategies to enlarge its target group. Also must take the two issues concerning the Oyster into account. As they, may discourage users to switch to private means of transport. Therefore efficiency of the system must be considered and improved, certainly not forgetting the benefits Oyster puts forward to customers but it will enable customers use Oyster with confidence. ...read more.

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