Micro Eco
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? • What may be the likely reasons for the difference in price elasticities between long run and short run?
More research
• Mr. Nair had
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? • What may be the likely reasons for the difference in price elasticities between long run and short run?
More research
• Mr. Nair had