Writing Skills - IGCSE Example 1
Megabus provides cheap bus travel in Canada, the US and the UK. Research showed that if incomes rose by 10% then the quantity demanded for bus travel would fall by 15%.
With reference to the data above and your knowledge of economics, analyse why this knowledge could be useful to a firm such Megabus. (Source : IGCSE Jan 2023)
Possible answer:
As Megabus operates in a market where they provide cheap bus travel intending, they may get many passengers considering the fact that the income among the people in the country may not be that high. This is because, generally, a country with people having lower income are likely to choose public transportation more than having their own vehicles. Opposite may happen if the income level among people increases.
Considering the fact above, Megabus would always have to be keen to check on the market conditions and make plans according, so that, they can overcome any demand related issues in the future.
Before I dive into the analysis, let me first present my basic understanding on income elasticity of demand. Income elasticity of demand is the proportionate change in quantity demanded by buyers to a proportionate change in their income. It is measured through percentage change in quantity demanded over percentage change in income.
To delve into the analysis, the data provided in the case study would be helpful for the Megabus as they can use the data to calculate the income elasticity of demand which is very much relevant to their business. From the data, this is evident that the bus travel is considered as inferior good as the quantity demanded for bus travel decreased by 15% in response to the increase in income by 10%. it is also evident that the income elasticity of demand is -1.5. This means, the elasticity of income for bus travel is elastic which also mean any rise in income among the people will cause a greater proportionate decrease in quantity demanded for the bus travel stating the responsiveness among passengers to a change in income is very high. This is because, the bus travel is considered as inferior good among people, so when they see their income is rising a large number of people may immediately avoid taking bus travel and substitute them by buying their own vehicles or upgrading them to some other mode of transportations such as carpooling, metro services or two wheelers. Opposite may happen if the income among people falls.
As a result, Megabus can use the data to reach onto a conclusion where they may decide to provide improved bus services to attract more passengers or may decide not to expand if the bus services are not going to be preferred by the people for sometimes in Canada, US and UK. On the other hand, when the income starts to fall, they may decide to reinvest to increase their capacity as there may have many passengers willing to travel by bus.
All those planning will help Megabus to avoid incurring any extra cost or may help to reduce their costs especially by not hiring or not paying higher wages to their employees. This may help them to sustain in the market till the time when they get to enjoy higher profitability due to higher demand for their bus services again.
0 Comments