Reflective Exercise: students’ rail fares –Branson’s good deed?
1
Scenario
Rail companies offer discounted fares to students on certain journeys. Are the rail
companies being kind to students in offering cheaper fares with young persons’
railcards?
Section 1: Setting the framework for investigating this question
a
b
c
d
A Which of the following is more applicable to economic modelling? (More
than one may be)
We need to examine student users compared to standard users, various
other types of rail users such as the retired and families, and the various
fares available at different times.
We need to examine students compared to standard users and ignore
other complications.
Before analysing this question we need to know much more about the rail
fare structures.
We will start by assuming that the rail companies are acting in the interests
of their customers since customers are the key to any business.
feedback page 5
B Cross out the incorrect option in these sentences:
1. People are willing to pay the same/different prices than others to go on a
particular rail journey.
2. Students are more/less price sensitive that the ‘average’ person.
3. The demand curve for rail journeys for students is more/less elastic that the
‘average’ person’s.
feedback page 5
C Which of the following are true? (More than one may be)
In deciding the profit maximising price the rail company will have to:
a Establish the marginal journey that gives the highest profits from that
journey.
b Sell tickets for each additional journey where they make a profit, no
matter how small.
c Put aggregate marginal revenue = aggregate marginal cost. (That is treat
all customers together.)
d Realise that for students because their demand is different so is the
marginal revenue compared to standard rail users and this will affect the
price they can be charged.
feedback page 5
Copyright: Embedding Threshold Concepts Project
11/09/08
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.
Reflective Exercise: students’ rail fares –Branson’s good deed?
a
b
c
d
2
D Which of the following are true? (More than one may be)
Students have to buy and show their railcards because that way they can
prove they are entitled to cut-price tickets.
Rail companies want students just to consider the low fare price for a
particular journey and not take the extra payment of the railcard into
account when making their decision to travel.
The marginal price of a rail journey to students is the price of the ticket.
The marginal price of a rail journey to students is the fare plus the cost of
the railcard divided by the number of journeys they make.
feedback page 6
E Which of the following are true? (More than one may be)
The marginal cost of an extra (student) passenger on a non-peak time
train is very small.
b The marginal cost of an extra student on a non-peak time train is equal to
the cost of running the train per person.
c If there would otherwise be empty seats on the train, it would be in the
interest of the rail companies always to reduce prices to get more
customers.
d If there would otherwise be empty seats on the train, it would be in the
interest of the rail companies to increase prices to cover their costs.
feedback page 6
a
Copyright: Embedding Threshold Concepts Project
11/09/08
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.
Reflective Exercise: students’ rail fares –Branson’s good deed?
3
Section 2: ‘Are the rail companies being kind to students in offering
cheaper fares with young persons’ railcards?’
What economic concepts are important in considering this question?
Remember to use the economic concepts considered in section 1 in your answer.
Your answer…
You can continue your answer on another sheet if needed…….
feedback page 7
Copyright: Embedding Threshold Concepts Project
11/09/08
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.
Reflective Exercise: students’ rail fares –Branson’s good deed?
4
Follow-up questions
Now use what you have learnt to explain why young persons’ railcards have the
following conditions:
1. You cannot buy a season ticket with your student railcard.
2. To buy a reduced price ticket, you must show your student railcard.
3. Although railcards are for young persons aged 16-25, they can also be
purchased by mature students (those over 25) as long as they supply
recognised proof of being a student.
feedback page 8
Copyright: Embedding Threshold Concepts Project
11/09/08
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.
Reflective Exercise: students’ rail fares –Branson’s good deed?
5
Feedback Section 1: Setting the framework
A
Economists like to concentrate on the most important factors, which for this question
is what students pay compared to the standard price: thus (b) is more applicable.
They assume that companies act in their own interests and here we will assume that
means companies are trying to profit maximise. This does not necessarily mean that
it is against the interests of customers – just that it is not the prime motivation (i.e. (d)
is incorrect).
B
1. Different prices – some journeys are more important and people have different
taste and incomes.
2. The lower income of the average student is likely to make them more price
sensitive (that is their demand is different from other consumers).
3. Demand elasticity measures the responsiveness of demand to price; the higher
price sensitivity of students implies that their demand is more elastic.
C
The condition for profit maximising is that marginal revenue = marginal cost. As long
as a journey is adding to profits (that is the revenue on that journey is greater than
the cost of that journey), even by a very small amount, it will be increasing the total
profits on all journeys. Thus (b) is correct, not (a).
Different customers are willing to pay different prices. This is illustrated in figure 1. If
companies can get different customers to pay different prices depending on their
demand, they may be able to increase their profits by putting marginal revenue
equal to marginal costs for each group of customers, rather than customers overall.
That is companies can price discriminate to increase profits. Thus (d) is correct, not
(c).
Figure 1: Consumer Surplus
• If the market price is set at P1, then this is the
price that all customers will pay.
Price
• However, some customers (for instance
businessmen) are willing to pay higher prices (P2)
for a small number of journeys (Q2).
a
• If rail companies can charge higher prices to
these customers (and keep the lower prices for
other customers) they can increase overall profits.
P2
Market
Price
b
P1
• The triangle a b P1 is known as the consumer
surplus – the amount customers could have been
charged for individual journeys compared to what
they are charged. Profit maximising companies
will try to reduce the size of the consumer surplus.
demand
Q2
Q1
Quantity
Copyright: Embedding Threshold Concepts Project
11/09/08
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.
Reflective Exercise: students’ rail fares –Branson’s good deed?
6
D If the rail companies did not ask for proof when using a young person’s ticket,
then people who were not in that category could use them. Thus (a) is correct – it is
a method of preventing resale (which is a condition of price discrimination). Having
bought a railcard, the price of each journey is just the fare – in economist’s terms the
railcard is a sunk cost. Thus (b) and (c) are correct (and (d) is not).
E If a train is running then the journey costs will hardly vary with an extra
customer. The train and line infrastructure is fixed; the train will still have a driver, etc.
There may be a very small amount of extra fuel used because of the extra weight
being carried. Thus (a) is correct and not (b) (which is the average cost).
However, (c) is not necessarily correct. The companies do not want to reduce prices
to those customers prepared to pay the higher prices (those with an inelastic
demand). Neither is (d). Putting up prices can reduce demand and lead to emptier
trains and if they are going to maximise profits they need to consider putting
marginal cost = marginal revenue for each of the differentiated groups of
customers.
Copyright: Embedding Threshold Concepts Project
11/09/08
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.
Reflective Exercise: students’ rail fares –Branson’s good deed?
7
Feedback Section 2: The approach of economics
Important among the concepts economics would use are:
* Simplification: economists simplify in order to concentrate on the most important
factors (section 1A).
* Incentives: in this case could the rail companies’ profit-seeking behaviour be the
reason for low prices to students? Students will have a greater incentive to
undertake rail journeys if they are charged lower prices (section 1A and 1C).
*Elasticity: some groups of customers have different elasticities of demand and if
companies can charge those with inelastic demands higher prices they can make
higher profits by reducing the consumer surplus. They can price discriminate
between customers. To do this effectively the company has to have some way of
identifying the different groups and preventing resale (section1B and 1C).
* Marginality: rail companies will put marginal revenue = marginal cost if they want
to maximise profits. However, different consumers have different marginal benefits
from a rail journey and if rail companies can discriminate between these customers
they can put marginal revenue = marginal cost for each group separately and
increase their profits. They can charge higher prices to those with inelastic demands
and lower prices to those with elastic demands such as students (section 1B and C).
The marginal cost is very low for additional passengers on an off-peak train (section
1E).
Reflection In your explanation did you:
1.
Recognise the price discrimination of students?
2.
Use the concept of consumer surplus? Can you show the
size of the consumer surplus on a diagram?
Yes
Partly
No
Do you consider it good or bad that students are subject to price discrimination?
Copyright: Embedding Threshold Concepts Project
11/09/08
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.
Reflective Exercise: students’ rail fares –Branson’s good deed?
8
Feedback: Follow-up questions
1. Season tickets are bought for purposes such as work or attending college
regularly. The demand will be inelastic for such journeys, as they are fairly
essential. Charging young people the full price will not greatly reduce demand,
so it is not in the rail companies’ interest to do this (section 1B and C).
2. This is to stop other people (perhaps with less elastic demands) buying the tickets
– it enables the student group to be identified and prevents resale (section 1D).
3. Mature students are likely to have the same demand as other students: hence
the rail companies want to treat them equivalently, but want to stop nonstudents getting the cheaper fares (sections 1B, C and D).
Copyright: Embedding Threshold Concepts Project
11/09/08
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.
Reflective Exercise: students’ rail fares –Branson’s good deed?
9
Notes for lecturers
Objectives of the exercise and prerequisites
Learning Focus: Developing an understanding of price determination, market
power and price discrimination
Threshold Concepts that are pivotal to this exercise are economic modelling,
marginality and price incentives.
Prior Knowledge Required
Students require prior knowledge of demand and supply, elasticity and the
conditions for profit maximisation.
Sequencing and timing
1. With this exercise, provide feedback to section 1A and B before
attempting section 1C, D and E. We suggest this is initially given
verbally if the exercise is completed in class time.
2. The completed feedback to section 1 should be given before students
attempting section 2.
3. In section 2 students are asked about economic concepts that are
important in an answer and the feedback concentrates on four
threshold concepts that are important.
4. The exercise will take around 30-40 minutes to complete.
5. The follow-up questions do directly test the understanding of some of
what has been covered in a series of applied questions. Feedback is
provided.
Copyright: Embedding Threshold Concepts Project
11/09/08
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.