Executive Summary

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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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