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?
Variation of the Quantity of people with change in fair

Price Quantity Revenue Net Change in

(in Rs.) (in millions) (in millions ) Revenue
(in millions)
15 0.800 12.00 0.00

16 0.785 12.56 0.56

17 0.771 13.11 1.11

17.5 0.764 13.37 1.37

18 0.758 13.64 1.64

19 0.745 14.16 2.16

20 0.734 14.68 2.68

 Solution : Fair Hike in the short run
• To cover the additional expense of Rs.474 million in the year,
an average of Rs.1.3 million per day should be earned in
addition to the current income.
• From the table, taking the average fair at Rs.17.50, we see
that an additional income of Rs. 1.37 million is being earned
everyday. Hence, in a year:
Increase in income = 365 days * Rs. 1.37 million
= Rs.500.05 million
 Solution (cont..)
• This strategy of fair hike will not work in the long run. Refer to the
table below:
Price Quantity Revenue Net Change in
Revenue
(in Rs.) (in millions) (in millions ) (in millions)

16 0.683 9.984 - 2.016

17 0.640 9.979 - 2.021

14 0.791 11.07 - 0.93

13 0.859 11.17 - 0.83

7 1.715 12.00 0.00

6 2.047 12.28 0.28

5 2.533 12.67 0.67

 Solutions ( Contd..)
• As we can see from the table, in the long run, a fair change is
not giving decent enough revenue. When there is hike, we
can see that the losses are increasing. When there is a
reduction in the fair, there is a slow increase in the revenue,
but that increase is not good enough. Even for a fair of Rs. 5,
the net revenue per day is increasing only by Rs. 0.67 million,
which is not enough to cover the Rs. 474 million deficit.
 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)
 Better alternative
• 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?
Lowering travel time by 1%:
Quantity = 0.806 million
Revenue = 0.806 million * Rs.15 = Rs. 12.09 m
 Increasing fair by 1%
Quantity = 0.798 million
Revenue = 0.798 million * Rs.15.15 = Rs. 12.0897 m
There, there isn’t much difference in the short run for the two
approaches. But for long run, the elasticity for travel time is
positive, hence it makes little sense to choose this alternative.
 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? The
difference exists because there is no parity in the income of the
people living within the city and those living in the suburban areas.
Hence, when there is a price increase, the two will respond
differently which leads to their price elasticity being different. Their
time elasticity values will be different because there is a good
amount of difference in their average travel times. Hence, their
response to a change in travel times will be different which leads to
their travel elasticity values varying.
 Some more research
• What does the income elasticity tell you? Here, it is given that the
income elasticity is negative. It implies that metro is an example of
‘inferior goods’, so an increase in the income of the population will
cause people to move from metro to other forms of transport like
personal vehicles, etc.