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 if
Ministry of Environment does not
award this money
A shortfall of Rs 474.5 million

Case Problem.
Another possible source of fund
City funds Delhi, Noida and GurgaonBut 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 the 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?
(Assume that Environment Ministry comes
up with its money and assume that each
years 365 days has the same demand
curve)

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?