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Case 1: The Oresund Bridge A not-so-popular Nordic bridge Question 1: What are the factors that affect the

demand of the Oresund Bridge? What can you infer about the elasticity of the demand of bridge from the above case?

Factors affecting the demand of the Oresund Bridge are: 1. Tourism - As can be seen in the case, when it was the season of summer tourism, there was a boost in demand of bridge, but as the summer passed, and tourism season was over, there was a decline in the usage of the bridge. 2. Cost of using the bridge The case specifies that even the ministers analyzed that the cost of driving over the bridge is too costly. And therefore, is one major factor that the demand is affected because of it. The authorities also decided to knock almost 50% off the price of a one-way crossing for the last three months of this year. 3. Entrance of substitutes: train and ferry - The substitutes are also one of the main factors that affect the demand and elasticity of any product. In this case, we can see, that the train connecting Sweden and Denmark attracted more passengers than did the bridge mainly because it was cheaper. Not only the trains, few businessmen also advised their employees to use ferry instead of bridge mainly because of the cost difference associated with them. 4. Commercial Traffic trend - The next factor to be taken into account is the general commercial traffic trend. It also influences the demand of bridges, if the general traffic trend is not going up, the demand will automatically decrease, but if the trend I upwards, there are still chances that the demand may rise. 5. Income and population size - As is given in the case, the traffic is more one-sided mainly from the Scandinavian solidarity point of view. Along with that, people visiting art galleries and cafs, cross-border ventures in health, education and information technology also depends on the economic condition of the countries. 6. Advertising - It is believed that advertising would help in increasing the demand of bridge as the popularity will be increased among the people.

Elasticity of demand of Bridge: Elasticity is sensitivity of Quantity demanded to change of any factor that affect demand. From the case, and as explained in the above points, we can infer that the demand of bridge is elastic in nature. The co-efficient of elasticity is defined as the ratio of the change in the quantity of the product, in this case demand of the bridge (number of cars crossing the bridge) and the change in the price. Since, if the cost of using the bridge is reduced, the demand is expected to increase, we can say, that it is elastic in nature. Here, the major effect is of the price of the good and the price of the substitute good. Trains and ferry prices are lower than Bridge, leading companies to issue policies related to using substitute to save money. Some of the companies are trying to restrict the travelling along the border keeping in mind the

high price of the Bridge. So, here it is evident that the high price of the good and lower price of the substitute good is affecting the demand of the good. The policy of the government to reduce the price by 50 % to increase the demand and traffic signifies the elasticity of the demand curve. As well, there is approach to increase traffic by providing advertisement support.

So, there exist (1) Own price elasticity, (2) Cross Price Elasticity, , and (3) Income Elasticity

Question 2: Draw a neat diagram with labeled axis to illustrate the market of the Oresund Bridge? If the Swedish and the Danish government have set the toll price, than what can you say about the equilibrium price compared to the price set by the government? What effect will advertisement camping planned by the bridge consortium will do to the market of the Oresund Bridge?

The market of the Oresund Bridge depend on factors like the price of the product, price of substitute options like Ferry, advertisements etc.

Initially, during the summer tourism, there was a boost in the usage of the bridge. But as soon as the season was over, the cars crossing the bridge fell sharply. According to the case, the bridge consortium says they always expected a dip in car traffic from a summer peak of 20,000 vehicles a day. But they admit that the current daily flow of 6,000 vehicles or so must increase if the bridge is to pay its way in the long run. This is shown in the diagram given below:

In our opinion, the price that was set up by the government was higher than the equilibrium price. And therefore, the demand was not meeting up the expected numbers. This is as shown in the graph below: (Note: Here supply is a straight vertical line because, it is not changing. It is a durable asset and once the bridge has been constructed, there is no variation in the supply with changing price.)

We believe that the effect of the advertisement will depend on the type of campaign the bridge consortium is planning. For example, if it is a plain advertisement, it would not bring in much positive effect. The market will be like this:

Whereas, for example, if the bridge is advertised as tourist attraction, the demand would increase much more in comparison to the previous case.

The best case would be when it is advertised as well as there is a reduction in cost as well. Both the cases are shown above. Question 3: Travelling by train or ferry between Sweden and Denmark will be substitute of using the Bridge. What can you predict about the equilibrium price of train and ferry? Explain your answer.

Since the cost of using the bridge is high, therefore, as per the case, people are tending to use trains and ferry as their substitute. In fact, IKEA, a Swedish furniture chain with headquarters in Denmark, has banned its employees from using the bridge altogether when travelling on company business, and has told them to make their crossings more cheaply if a lot more slowly by ferry. Along with that, train now connecting Copenhagen, the Danish capital, and Malmo, Swedens third city, is struggling to run on time because of the increase in demand. Thus, both the train and ferry are playing a role of substitute for the users of bridge.

Thus, we can say that there is an increase in the people travelling by train or ferry between Sweden and Denmark. As the demand will increase, the demand curve will shift upwards and new price equilibrium (P1) will be formed which will be higher than the previous price equilibrium (P0). This is shown in the above graph.

Question - 4: Explain how the price of durable assets like bridge or factory set in the market? Usually, the price of the durable assets are done so as to recover the cost incurred in a given span of time which is usually long, it might be even say, 10 years or 20 years, in case of a bridge or factory depending on the life span of the asset. Thus, considering the life span of the asset, adding a certain percentage of profit to the cost, the price is decided over the time in which it is planned to recover the cost. This is unlike the non-durable assets like food materials, where the pricing is done so as to gain from each and every product sold.