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
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