Questionnaire Results
The questionnaire results indicated the usage rating as follows:
The majority of travellers are students and work travellers, and the rest of the passengers are constituted by family travellers, the elderly, or others.
Price Elasticity of Demand Analysis
“The price elasticity of demand measures the responsiveness of quantity demanded to a change in price, with all other factors held constant.” ()
The formula to calculate this analysis is:
Proportionate change in quantity demanded
Proportionate change in price
Therefore, “if elasticity is greater than 1 then revenue increases when the price declines because the quantity demanded increases by larger percentage than the price falls” (Parkin, 1990).
P↓, Q↑= TR↑ (P= Price, Q= Quantity, TR= Total Revenue)
“When the elasticity is less than 1, the revenue decreases when the price rises because the quantity demanded decrease by larger percentage than the price falls” (Parkin, 1990).
P↑, Q↓= TR↓
This can be illustrated in the following diagram:
Revenue and elasticity of a straight line demand curve.
Along the straight-line demand curve at the top, the price elasticity ranges from above 1 (to the left) to below 1 (to the right). As the price decreases, the quantity demanded increases by smaller and smaller percentage amount. Thus, revenue (price X quantity) first increases and then decreases (Taylor, 1995).
Elasticity Analysis of Passengers
From the questionnaire results, it has been indicated that family travellers, the elderly, and others have an elastic demand. This statement is derived from the assumption that all passengers that use the economic class ticket have an elastic demand. Therefore, the above-mentioned passengers will have and E.D.p. of 1.6.
This has been calculated using the following formula:
E.D.p.= %△Qd
%△P
Applying this formula to calculate the price elasticity demand for the above stated passengers, the following results and diagram was produced.
P0= £3.40 1 Q0=3 millions passengers
P1= £2.80 Q1=5.8 millions passengers
Hence,
£3.40 - £2.80 = £0.60 *100 = 60%
5.8 m – 3 m = 2.8m/3m = 0.93333…*100 = 93.33%
= %△Qd
%△P
= 93.33% / 60%
= 1.5555…
=1.6
Illustrating this in a relatively elastic demand curve, the consequent diagram is produced:
Assuming that there are 3 million passengers using the London Underground a day, at a price of £3.40 (to all zones in a single fare for adults), the total revenue given will be £10.2m. By decreasing the price to £2.80, the quantity demanded will increase to 5.8m generating total revenue of £16.24m, which is approximately 63% increase in total revenue a day.
Inelasticity Analysis of passengers
Reflecting back to the questionnaire yet again, it was shown that work travellers and students have an inelastic demand. Meaning no matter how much ticket prices fluctuate, they will travel by tube to a greater extent.
A good or service is considered to be inelastic when the price elasticity demand is less than 1; therefore, the demand is not very responsive to changes in price.
P↑, Q↓ = TR↑
P↓, Q↑ = TR↓
Relating this concept to the use of the tube (London Underground) the E.D.p. is equal to 0.6 (less than 1).
Using the previous formula, calculations can be undertaken, and a diagram can be produced to show the inelasticity of demand.
Therefore,
E.D.p. = %△Qd
%△P
P0= £752 Q0= 4500003
P1= £150 Q1= 315000
£75 / £150*100= 50%
450000 – 315000= 135000/450000= 0.3*100=30%
= 30% / 50% = 0.6
This is a relatively inelastic demand curve
Revised Total Revenue
£150 * 315000= £47,250,000
Being, an increase of 71% as,
£75 * 450000= £33,750,000
hence,
33,750,000 / 47,250,000*100= 71%
As the price of tickets for work travellers and students is increased, greater revenue will be earned. The opposite equation will be for the elastic passengers; if price is reduced then greater revenue will be made.
Factors that determine the value of price elasticity of demand
1. “Number of close substitutes within the market - The more (and closer) substitutes available in the market the more elastic demand will be in response to a change in price. In this case, the substitution effect will be quite strong.
2. Luxuries and necessities - Necessities tend to have a more inelastic demand curve, whereas luxury goods and services tend to be more elastic. The demand for vacation air travel is more elastic than the demand for business air travel.” ()
Determinants of price elasticity of demand for users of the London Underground
- If the price of the tickets for the elastic passengers was increased, then it would be likely that they would take the substitute services for tubes, i.e. buses, coaches, and carpool, as these are the closest substitutes that travellers may convert to. However, in this case, the price is reduced, therefore, more people may decide to take the tubes, i.e. some students who house rent may decide to commute everyday if the costs to travel works out cheaper; tourists may take the tubes rather than taxis or car rental.
- Travelling on the London Underground for work and school could be considered as a necessity, as these people need to be on time and meet deadlines. Therefore, the increase of the price for these passengers will not make a greater percent change in quantity demanded; consequently, they will continue using the tubes.
Other offers
Some services provided by the London Underground will be updated in order to ensure efficiency and service excellence. For example, some passengers find that tube and train services are not the best method of travelling, due to the frequent delays and cancellations. It will be ensured that these problems do not occur by acquiring more operators and ensuring regular circuit checks.
Special discounts will also be offered to those passengers who use the tubes frequently; discounts such as student tubecard, family discount cards, etc. (these are currently offered, however, the discount amount will be increased).
If these adjustments and recommendations are followed, it is believed that the financial position of the London Underground will be secured.
Conclusion
For the total revenue of the London Underground to increase it is essential that fares be adjusted according to elasticity of demand of the passengers using the tubes. This has been thoroughly analysed throughout the report, taking important factors into consideration. Therefore, it has been decided that fares for elastic passengers should be reduced, helping to generate greater total revenue, and to increase the fares for the inelastic passengers, yet again increasing the total revenue for the London Underground.
C) Three examples of products/services that can either have elastic/inelastic price elasticity of demand.
Elastic demand
Furniture
This is an elastic product because if the price is increased the demand will decrease generating reduced total revenue. This product is also a luxury product; therefore, the demand for this will be more elastic.
Diagram 1
P0
P2
Q
Cars
Cars are also an elastic product as price rises, demand decreases, giving reduced total revenue. If, for instance car prices rise, consumers will switch to closer substitutes, such as bus, coaches, train, etc. (see diagram 1).
Televisions
A TV is yet again an elastic product as P↓, Q↑= TR↑ and P↑, Q↓= TR↓. A TV is a luxury good, therefore, if the price of such product increases, consumers are likely to purchase less of it. (see diagram 1).
Inelastic Demand
Cigarettes
This is a relatively inelastic product, as the price rises or decreases, the demand will not change by a greater percentage. Cigarettes are also a habit forming good, as preferences are such that habitual consumers of such product become de-sensitised to price changes.
Clothing
Clothing is a very inelastic product, as the change in price will not lead to a change in demand. It is assumed that this is the necessary clothing. Therefore, necessities tend to have a more inelastic demand.
Beverages and food
This also has a very inelastic demand. It is a necessity and the percentage of income spent on such goods tends to be small; therefore, the purchase of such goods has very inelastic demand.
REFERENCE LIST
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Anonymous. n.d. Transport for London Underground The Tub. [Online], Available from: , accessed on [2003, Nov 12]
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Bett, W. (2003) Tutor2u Online Learning Resource of the Year. [Online] Available from: , accessed on [2003, Nov 14].
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Buchholz, T. G. (1999) From Here to Economy: A shortcut to economy literacy, [Online], Available from : , accessed on [2003, Nov 16].
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Parkin, M. (1990) Economics, Addison-Wesley Publishing Company, London, p.109.
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Taylor, J. B. (1995), Economics, Houghton Mifflin Company, New Jersey, p.122.
1 This is the price of adults traveling a single fare in the tube to all zones (1,2,3,4,5 &6).
2 This is the price for a fully equipped meeting room for businessmen for half day at King Cross.
3 Assuming that 15% of the passengers using the tube are businessmen.
