Anyone who has ever rode anywhere on a Greyhound bus will tell you it’s no fun. I’ve travelled from Vancouver to Calgary, and it was 14 hours. The scenic vistas of our majestic Rocky Mountains is overshadowed by the lack of feeling in the rider’s ass after sitting in one uncomfortable seat for hours on end. I got past it by thinking about my dear mom, who I was on my way to visit, and who had also paid for my ticket as a gift. I think most people who have rode the bus would much rather take ANY other form of transportation to get where they’re going. However, some people begrudgingly ride that bus because it works for them. I would say the demand for Greyhound Bus tickets is fairly elastic, since there are numerous alternatives, such as driving yourself, flying, or even hitchhiking, which are all comparable in price. The elastic demand of Greyhound tickets would cause a rise in price to result in a drop in total revenue.
Greyhound recently decided to add a fee they cleverly called a ‘gift fee’. Sounds charming! I love gifts!! This fee was about $20 on top of the cost of a ticket for the purpose of protecting a credit card holder from fraud when they purchase a ticket for someone other than themselves as a gift. Naturally consumers were not happy, but it is in fact Greyhound who should be even less happy about the fee because it will cost them revenue. Hypothetically, let’s say the demand curve for Greyhound tickets looks like this. It’s shallow, indicating it’s elastic.
I recall the ticket price my mom was charged to be about $80, and at that price I would estimate the market demand to be about 8 tickets a year for the average family taking a trip. If Greyhound were to add a surcharge of $20 onto each ticket, the quantity demanded is going to drop considerably. Less tickets purchased, means less revenue. This can be proven by calculating that the Ep = % Chg Qd / % Chg Price. In this case, it works out to 46.15% / 22.22%, which gives us an elasticity coefficient of 2.07. This means that a 1% change in price will result in a 2.07% change in quantity demanded. More importantly, it means that Greyhound will be selling 5 tickets per year to each family who were purchasing 8 previously, all because of the higher price. This works out to revenue of just $500, down from $640 from each family per year. Greyhound has to consider the elasticity of their customer’s demand when making changes to their price. Elastic demand means that a rise in price will result in a drop in revenue.
Hypothetically, if an international airline were to add a surcharge (and they loooove to do that) to the price of their tickets, they would actually make revenue despite selling less tickets. As per the graph below, the reason for this is because the demand is inelastic, or steeper.
I estimate the demand for international flight to be roughly 8 tickets per year per family at around $350 each (which you will win back on a slot machine immediately when you get to Las Vegas). If the airport added a $50 airport improvement tax to the price of the tickets, it doesn’t leave the consumer with a lot of options. There’s not a lot of substitutes for long distance air travel. You could drive to Mexico, but it’d take the entire week you booked off of work to get there. If you’re a business traveler, you need to go wherever you need to be in order to keep your job, even if that means a flight across the Atlantic. Good luck driving to England from Calgary. The inelasticity of the demand for long distance air travel is such that a rise in price will actually result in a rise in revenue, despite the lower quantity demanded. In this example, Ep = 6.45% / 13.33%, which gives us a elasticity coefficient of 0.48. A 1% change in price will result in a 0.48% change in quantity demanded. Revenue will increase from $2800 per family of travelers per year to $3000, all in spite of a drop in quantity demanded.
Citations
David Lazarus. (2010, September 14). Bus ticket fee is an $18 gift for Greyhound
LA Times, Online. Retrieved December 1, 2011, from Google
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