Executive Summary :: Economics

Executive Summary This report will look for alternative ways in which the London Underground can change their prices in order to reduce their loss in terms of total revenue. The report will both identify and analyse these alternative methods in an attempt to find the most suitable way of increasing the revenue for the London Underground. The report will also look at how elasticity plays a key role in determining any decisions as well as the outcome of these decisions made. The London Underground is at this very time running at a loss and is in urgent need of things being turned around. The London Underground may at one point in the future be privatised. What we need to determine is how we can increase revenue before it floats so that potential shareholders will be attracted. We must see how prices can be adjusted in coincidence with the market segments so that revenue can be increased. Elasticity is crucial in our thinking as it can have a big impact. 1.1 DEFINITION OF ELASTICITY Elasticity is the concept in economics that measures the responsiveness of one variable in response to another variable. The best measure of this responsiveness is the proportional or percent change in the variables. This gives the most usable results for any type or range of data. Thus elasticity is the proportional (or percent) change in one variable relative to the proportional change in another variable. The general formula for elasticity is: E = percent change in x / percent change in y 1.12 DIFFERENCE BETWEEN ELASTIC AND INELASTIC DEMAND Elastic means something is highly responsive to changes in something else. For example, elastic demand means that the quantity demanded changes a lot when the price changes. Inelastic demand means that the quantity demanded does not change much when the price changes. 2.0 WAYS IN WHICH FARES CAN BE ADJUSTED 2.01 OPTION 1 One way of adjusting prices can be to decrease the fares for students. Students often use this service as a means of transport to get to their respective universities. If fare prices are lower, even though the income per ticket is less, it may overall increase sales revenue. Other discounts may also be offered if a quarterly or seasonally train pass was purchased, which would attract student to this service. 2.02 OPTION 2 Fare prices can be increased because many people see this service as inelastic as they do not have any other means of transport. A lot of business people use this service and may well be able to afford to pay the extra cost. However this is a very risky method as it may encourage people to use private transport which may take the business