Case Example

Delhi Metro

Case Problem
MD of Delhi Metro worried as Projected revenues were Rs 674.5 million below the projected costs for next year Rs 200 million promise from State A shortfall of Rs 474.5 million Another possible source of fund City funds Delhi, Noida and Gurgaon- But unlikely due to problems in city Budget How to solve his pending budget crisis?

Case Problem (continue)

Mr. Sreedharan glanced through a Business magazine while his thoughts travel in the direction of solving the budget Suddenly his eyes fell on the article The Journey to Work in the Metropolitan Area He noticed the following Short run fare elasticity -0.3 Long run fare elasticity -1.1

Facts and figures

Current daily ridership of Delhi Metro is 0.8 million at average current fare of Rs15 per ride A linear approximation can be made for Delhi Metro according to MD. In the short run most costs would be fixed, that does not vary with ridership Variable operational costs would change slightly with change in ridership and can be ignored.

Facts and figures

Thus if his budget problems to be solved the solution must come revenue side MD immediately calls his immediate manager Mr. Nair and asks What does the study in this Business Magazine tell us about the demand for our services and can we use the information in there to help us balance our budget?

Can you help out Mr. Nair ?

What is the short run daily demand curve for transit given the information from the Business Magazine and Delhi Metro? What short run strategy (in general and specifically) would you come up with given this demand curve and the pending budget needs of the Delhi Metro system?

Can you help out Mr. Nair ?

Will this same type of strategy work in the long run? Specifically why or why not? What should the MD do? (Assume no investment and disinvestment is needed and that you can ignore the slight changes in cost associated with changes in ridership) What may be the likely reasons for the difference in price elasticities between long run and short run?

More research
Mr. Nair had also discovered that the Research organization who came up with the article, also made an advanced study of elasticity with respect to Delhi Metro Travel Time. The short run elasticity travel time is -0.7, while long run travel time is 1.6. Nair knows that it costs the same amount to implement the fare increase (new settings of the fare machines, etc.) as it would cost to bring about a 1% lowering of transit times (by speeding up vehicles, etc)

Can you help Nair?

If you could only do one of the above in the short run (raise fares by 1% or lower travel time by 1%), what would you do? Why?

Some more research

Urban/Suburban differences exist in the fare and time elasticities. The suburbanites have more elastic fare elasticities and more elastic travel time elasticities than the urbanites. In addition the income elasticity of demand for transit is negative for the whole greater Delhi Region. Why is there a difference in fare and travel elasticities? What does the income elasticity tell you?