Threshold Network Exercise: Pricing for profit – car parking
1
Scenario
You are approached by the private owner of a city centre car park who
wants to know how to increase his profits from parking during office hours on
weekdays. On a typical weekday, the car park is currently only half full.
What should be your advice?
You are not required to actually find the price, but to consider how you would
use economics to help you make the best decision.
In doing this you should:
(1) Consider an economic framework or model that you think is going to be
useful.
(2) Identify three important economic concepts from the list below you would
use in answering this question and explain why they are important in this
context.
Demand
Supply
Competition
Indirect taxation
Public good
Margin
Investment
Economies of scale
Elasticity of demand
Opportunity cost
Average costs
Fixed costs
(In the list there are concepts that are irrelevant and concepts that are useful. Some are
arguably more useful than others. Although there are some ‘wrong’ answers there is not just
one ‘correct’ one. Our feedback highlights our choice of three concepts but you will find we
use others on this list as well. In making your choice try to discard the irrelevant and consider
what you think is the most important amongst the others and why.)
feedback page 2
Copyright: Embedding Threshold Concepts Project
24/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for
Employment and Learning (DEL) under the Fund for the Development of Teaching and Learning.
Threshold Network Exercise: Pricing for profit – car parking
2
Feedback
In considering this question we need to first assess which economic
model/concepts/ideas are going to be useful.
Here we could start with considering demand and supply. We are told that
the car park is not full and to get more customers the owner can reduce
prices. But will this increase profits? Although the number of customers will
have gone up the price each is paying will have gone down. And what has
happened to costs? If prices should be reduced, then by how much?
Considering demand and supply by itself is not enough to answer these
questions.
The question lists the concept of the margin and this gives us an important
clue as to how to proceed. Formally economics has shown the rule to
maximise profits is to determine output where:
marginal revenue = marginal cost
and then charge the maximum price at which you can sell this output (as
long as variable costs are covered). The application of this rule depends on
the market structure – perfect competition (where the marginal revenue is
constant and equals price) or monopoly.
If we apply this to this case:
The owner will have to consider if attracting additional cars to the car park
will add to his profits. For each additional car (the marginal) he should
consider whether it adds more to revenue than to costs. If it does, he wants
to attract that car to the car park because it adds to his profits.
* We have to crucially consider the demand for car parking as this affects the
marginal revenue that can be obtained. This involves considering the
competition, which affects the elasticity of demand (for instance, if there are
other car parks that are not full this may be high as customers can easily
switch to others – this is close to the perfectly competitive case).
* The marginal costs should be in opportunity cost terms (that is in terms of the
alternative uses of the resources now) not historic costs (such as the costs of
building the car park, or of subsequent interest payments the owner is making
etc). We need to consider the current and future situation for decision
making, not the past. The marginal costs are likely to be very low in this case
(why?).
Our choice of important concepts is in bold. The following are not useful
here: indirect taxation, public good, investment, economies of scale,
average costs and fixed costs.
Copyright: Embedding Threshold Concepts Project
24/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for
Employment and Learning (DEL) under the Fund for the Development of Teaching and Learning.
Threshold Network Exercise: Pricing for profit – car parking
3
:
Reflection
1.
Did you identify the important economic concepts
to use?
2.
Did you explain why marginality was so important?
3.
Do you understand why it important to consider
both costs and revenues?
4.
Do you understand why it important to consider
costs in opportunity cost terms?
5.
Do you understand why certain concepts were
irrelevant?
Yes
Partly No
If your answer is ‘No’ or ‘Partly’ to any of the above, which of the following do
you now intend to do to improve your understanding?
1. Ask for guidance from my tutor.
2. Read a relevant section in a textbook.
3. Work though some example questions.
Copyright: Embedding Threshold Concepts Project
24/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for
Employment and Learning (DEL) under the Fund for the Development of Teaching and Learning.
Threshold Network Exercise: Pricing for profit – car parking
4
Notes for lecturers
Objectives of the exercise and prerequisites
The threshold network exercises are designed to help students recognise the
importance of economic concepts and modelling. They are concerned with
how economics uses a range of concepts (in a connected web) in answering
applied questions and getting students to recognise which concepts are
important and how they relate to each other in the specific context.
Learning Focus: Developing an understanding of profit maximisation.
Threshold Concepts pivotal to this learning are marginality, elasticity of
demand and opportunity cost.
Prior Knowledge Required
Some prior knowledge of the demand and supply and elasticity are
necessary. The exercise can be used to reinforce ideas of maximisation
already covered or, with class discussion, to introduce such ideas.
Timing
We would suggest that this exercise is likely to take students around 15-20
minutes to complete. It may be undertaken individually or in groups. This
timing does not allow for any presentation by students of their findings.
Copyright: Embedding Threshold Concepts Project
24/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for
Employment and Learning (DEL) under the Fund for the Development of Teaching and Learning.