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| Total fare collection = fare number of passengers | (1) |
In this stark form, equation (1) emphasizes, and thus organizes our thoughts around, two factors: the fare and the number of passengers. London Transport directly controls the fare, but can influence the number of passengers only through the fare that is set. (Cleaner stations and better services might also encourage passengers, but we neglect these effects for the moment.)
It might be argued that the number of passengers is determined by habit, convenience, and tradition, and is therefore completely unresponsive to changes in fares. This is not the view or model of traveller behaviour that an economist would initially adopt. It is possible to travel by car, bus, taxi, or tube, and decisions about a mode of transport are likely to be sensitive to the relative costs of the competing alternatives. Thus in equation (1) we must not view the number of passengers as fixed but develop a ‘theory’ or ‘model’ (we use these terms interchangeably) of what determines the number of passengers. We must model the demand for tube journeys.
We can study the theory of demand in detail. Applying a little common sense, we can probably work out the most important elements straight away. First, the fare itself matters. Other things equal, higher tube fares reduce the quantity of tube journeys demanded. Of course, what matters is the price of the tube relative to the price of other means of transport - cars, buses, and taxis. If their prices remain constant, lower tube fares will encourage tube passengers. Rises in the price of these other means of transport will also encourage tube passengers even though tube fares remain unaltered.
We now have a bare-bones model of the demand for tube journeys. We summarize this model in the formal statement:
| Quantity of tube journeys demanded = f(tube fare, taxi fare, petrol price, bus fare, ...) | (2) |
This statement reads as follows. The quantity of tube journeys ‘depends on’, or ‘is a function of’, the tube fare, the taxi fare, petrol prices, bus fares, and some other things. The notation f (1) is just a shorthand for ‘depends on all the things listed inside the brackets’. In equation (2) we have named explicitly the most important determinants of the demand for tube journeys. The row of dots reminds us that we have omitted some possible determinants of the demand for tube journeys in an effort to simplify our analysis. For example, tube demand probably depends on the temperature. It gets very uncomfortable in the underground when it is very hot. Since the purpose of our model is to study changes in the number of tube passengers, it will probably be all right to neglect the weather provided weather conditions are broadly the same every year.
To answer our original question, it is not sufficient to know the factors on which the demand for tube journeys depends. We need to know how the number of passengers varies with each of the factors we have identified in our model. Other things equal, we assume that an increase in tube fares will reduce tube passengers and that an increase in the price of any of the competing modes of transport will increase tube passengers. To make real progress, we shall somehow have to quantify each of these separate effects. Then, given predictions for bus and taxi fares and the price of petrol, we would be able to use our model to predict the number of tube passengers who would want to travel at each possible tube fare that might be set by London Transport. Multiplying the fare per journey by the predicted corresponding number of journeys demanded at this fare, we could then predict London Transport revenue given any decision about the level of tube fares.
Writing down a model is a safe way of forcing ourselves to look for all the relevant effects, to worry about which effects must be taken into account and which are minor and can probably be ignored in answering the question we have set ourselves. Without writing down a model, we might have forgotten about the influence of bus fares on tube journeys, an omission that might have led to serious errors in trying to understand and
forecast revenue raised from tube fares.
You have read the text. Check your understanding.
1) What controversy was there in 1980 over the ‘Fares Fair’ policy of cutting bus and tube fares in London?
2) How would economists organize the solution of fares problem?
3) How can the equation one organize our thoughts?
4) What organization directly controls the fares?
5) How can London Transport influence the number of passengers?
6) Is the number of passengers responsive to the changes in fares?
7) What theory or model should an economist develop to solve the problem of the number of passengers?
8) What is the relationship between fares and demand for tube journeys?
9) What is the dependence of the quantity of tube passengers on the fares of other means of transport?
10)For what purpose can we use the model given in the text?
11)How could we predict London Transport revenue?
12)What is the importance of building the model?
Case 2
Leipzig East Germany's second largest city, has attracted attention from office developers as it changes from a planned to a market system. The city has a shortage of office space. Most of its existing space is obsolete compared with Western standards. Also, if Leipzig is to achieve the status of other German cities, it needs to develop another 2 or 3 million sq.ft of office space. Developers are receiving a number of incentives, including grants, favourable tax treatment, EC regional grants and subsidised lending rates. Another attractive feature for developers is the state of rents. Because of the shortages rents have risen sharply and Leipzig is seen as a good investment opportunity by many property speculators.
However, there have been problems as the city copes with the transition.
Pollution from open cast mining in the countryside has disfigured much of Leipzig's building stock.
Inadequate building stock has resulted in housing shortages discouraging skilled workers from moving to the city. Hotel shortages have also restricted the number of visitors to Leipzig.
Poor transport infrastructure.
Many of the young and relatively well educated members of the population have migrated from the city. This has contributed to a population decline from 713,000 to 511,000 over a 50 year period.
Land ownership disputes have resulted in delays and frustration as land and property is transferred from the state to the private sector.
There has been a flood of goods from West Germany into the city.
You have read the text. Answer the questions.
(a) How far are the problems facing Leipzig a result of it being formerly part of a planned economy?
(b) How might cities such as Leipzig overcome the problems of changing from a planned to a mixed economy?
Case 3
THE DETERMINANTS OF PRICE ELASTICITY
What determines whether the price elasticity of demand for a good is high (say, -5) or low (say, -0,5)? Ultimately the answer must be sought in consumer tastes. If it is considered socially essential to own a television, higher television prices may have little effect on quantity demanded. If televisions are considered a frivolous luxury, the demand elasticity will be much higher. Psychologists and sociologists may be able to explain more fully than economists why tastes are as they are. Nevertheless, as economists, we can identify some considerations likely to affect consumer responses to changes in the price of a good. The most important consideration is the ease with which consumers can substitute another good that fulfils approximately the same function.
Consider two extreme cases. Suppose first that the price of all cigarettes is raised 1 per cent, perhaps because the cigarette tax has been raised. Do you expect the quantity of cigarettes demanded to fall by 5 per cent or by 0,5 per cent? Probably the latter. People who can easily quit smoking have already done so. A few smokers may try
to cut down but this effect is unlikely to be large. In contrast, suppose the price of one particular brand of cigarettes is increased by 1 per cent, all other brand prices remaining unchanged. We should now expect a much larger quantity response from buyers. With so many other brands available at unchanged prices, consumers will switch away from the more expensive brand to other brands that basically fulfil the same function of nicotine provision. For a particular cigarette brand the demand elasticity could be quite high.
Ease of substitution implies a high demand elasticity for a particular good. In fact, our example suggests a general rule. The more narrowly we define a commodity (a particular brand of cigarettes rather than cigarettes in general, or oil rather than energy as a whole), the larger will be the price elasticity of demand.
MEASURING PRICE ELASTICITIES
To illustrate these general principles we report estimates of price elasticities of demand in Table 4.3. The table confirms that the demand for general categories of basic commodities, such as fuel, food, or even household durable goods, is inelastic. As a category, only services such as haircuts, the theatre, and sauna bath, have an elastic demand. Households simply do not have much scope to alter the broad pattern of their purchases.
In contrast, there is a much wider variation in the demand elasticities for narrower definitions of commodities. Even then, the demand for some commodities, such as dairy produce, is very inelastic. However, particular kinds of services such as entertainment and catering have a much more elastic demand. Small changes in the relative price of restaurant meals and theatre tickets may lead households to switch in large numbers between eating out and going to the theatre, whereas the demand for getting out of the house on a Saturday evening may be relatively insensitive to the price of all Saturday night activities taken as a whole.
TABLE 4-3.ESTIMATES OF PRICE ELASTICITIES OF DEMAND IN THE UK
| Good (General Category) | Demand Elasticity | Good (Narrower Category) | Demand Elasticity |
| Fuel and light | 0,47 | Dairy produce | 0,05 |
| Food | 0,52 | Bread and cereals | 0,22 |
| Alcohol | 0,83 | Entertainment | 1,40 |
| Durables | 0,89 | Expenditure abroad | 1,63 |
| Services | 1,02 | Catering | 2,61 |
You have read the text. Check your understanding.
1) At what numerical quantities of the price elasticity is demand elastic or inelastic?
2) When do economists say that demand is unit - elastic?
3) What is the key piece of information which is required in setting prices?
4) What determines whether the price elasticity of demand for a good is high or low?
5) For what categories of commodities is demand usually inelastic?
6) What is the most important consideration which affects consumer responses to changes in the price of a good?
7) What is the demand elasticity for narrower definitions of commodities?
The most often used affixes
(Список наиболее употребительных аффиксов)
| Суффиксы | Префиксы | ||||||||
| существи-тельных | прилага-тельных | глаголов | наречий | | | | |||
| | | | | | | | |||
| er | ic | ate | ly | be | con | contra | in | ||
| or | ical | ise(ize) | ward | de | in | ultra | un | ||
| ist | able | fy | | re | en | super | non | ||
| ment | ible | en | | pre | sub | over | dis | ||
| ent | ory | | | se | ob | under | mis | ||
| ance | ary | | | per | dis | counter | | ||
| ence | ent | | | pro | ex | multi | | ||
| ity | ant | | | for | abs | inter | | ||
| age | ous | | | | trans | macro | | ||
| ion | ive | | | | | micro | | ||
| ure | ful | | | | | | | ||
| ness | less | | | | | | | ||
| th | ed | | | | | | | ||
| ing | ing | | | | | | | ||
Final Test
(итоговый тест)
I. К каждому английскому слову подберите русский эквивалент.
| 1. consumer 2. commodity 3. supply 4. percentage 5. determinant 6. stockbroker 7. transaction 8. substitute 9. output 10.return | 1. показатель 2. предложение 3. процент 4. потребитель 5. прибыль 6. выпуск продукции 7. затраты на производство 8. биржевой маклер 9. товар 10.заменитель 11.потери 12.сделка |
II. К каждому русскому слову подберите английский эквивалент.
| 1. доход 2. стимул 3. счет 4. износ 5. предпочтение 6. приоритет 7. налог 8. услуги 9. затраты 10.обязательство | 1. priority 2. pattern 3. services 4. liability 5. income 6. depreciation 7. incentive 8. account 9. preference 10.production 11.expenditure 12.tax |
III. Выберите из правой колонки существительное, которое может следовать за данным глаголом.
| 1. to bid up | a) taxes b) prices c) services |
| 2. to predict | a) the revenue b) the pattern c) the commodity |
| 3. to transact | a) choice b) profit c) business |
| 4. to distribute | a) consumers b) resources c) transactions |
| 5. to impose | a) taxes b) rates c) interest |
| 6. to sell at | a) a policy b) a share c) a profit |
IV. Выберите из каждой строчки два слова, наиболее близкие по значению.
1. a) estimate; b) forecast; c) priority; d) prediction.
2. a) spending; b) outlay; c) output; d) service.
3. a) profit; b) priority; c) behaviour; d) benefit.
4. a) to contribute; b) to afford; c) to allocate; d) to distribute.
V. Выберите правильный перевод данного термина.
1. price system
a) системная цена;
b) цена системы;
c) система цен.
2. retail price index
a) коэффициент розничной продажи;
b) индекс розничных цен;
c) ценность индекса розничной продажи.
