Investigation of the high school students' demand of bus tickets for local bus transportation in Tampere, Finland

This essay analyses buying responses of high school students in my school to price changes of bus tickets in the city of Tampere, Finland, on schooldays and weekends during a week. The reason for this essay is that, in the previous study of mine, I observed that the quantity demanded of bus tickets increased when the price increased for two immigrant high school students in Tampere. Thus, the research question became finally: “Are bus tickets Giffen goods for high school students in my school in Tampere, Finland?” The main problem in answering this question was in keeping other variables constant when observing the effects of price changes on the quantity demanded of bus tickets.

Data of this essay was gathered from the answers of students in my school in the questionnaire investigation from 21th September 2007 until 8th October 2007. In analysing data, students were divided into small groups along their residences, the lengths of their school journeys and their normal transportation methods to the school. These factors were used in considering certain students. Through this method, the validity of data could be analysed with the three main theories such as the law of demand, the income and price elasticities of demand by considering only selected students. Furthermore, data was considered with the income level, and on schooldays and weekends.

The conclusion of this essay is that bus tickets are not Giffen goods mostly for high school students in local bus transportation in Tampere because the main three theories were against the existence of Giffen behaviour. There was only an immigrant student who possessed Giffen behaviour and only on schooldays. This exception raised the need for the same investigation but focusing on the immigrant students taking into the account the few limitations observed in the research.

The existence of Giffen behaviour, behaviour where consumers demand more of a good or a service when the price increases, is controversial. Theoretically, it requires at least that the good or the service in question is inferior and that good represents a large proportion of consumer‟s budget, but actual examples have been hard to find (Blink & Dorton, p. 30). As poverty is normally related to Giffen behaviour (Blink & Dorton, p. 30), this essay concentrates on the consumer group who tend not to have regular wages and thus not high income, on high school students in my school and on their bus consumption in local bus transportation in Tampere.

In Tampere (Appendix 1) – a central area of Pirkanmaa, 180 kilometres southwards from the capital of Finland, a large amount of high school students come to the school on a bus. There are no underground or tram for their school journeys, hence, nearly their only transportation method is a bus as Tampere is the city of many lakes and long distances. About high school students‟ consumer behaviour for bus tickets, there has been little discussion and theoretical analysis in local bus transportation industry in Tampere. Exploring in IB Economics course and studying the types of goods in Microeconomics, I developed an interest how the price affects the quantity demanded of high school students‟ bus tickets. In my previous research where I investigated the effects of income level and availability of substitutes on the price elasticity of demand for high school students‟ bus tickets, I came up into the situation where the quantity demanded increased when the price increased for two immigrant high school students. Consequently, this essay focuses on the high school students: its guiding research question is “Are bus tickets Giffen goods for high school students in my school in Tampere, Finland?” which this essay tries to answer.

To answer the research question, this essay will first provide short explanations about theoretical types of goods and services and about the related economic concepts as applied in my study. After that, the essay will present a hypothesis and then the methodology about the data analysis methods for the high school students‟ answers in the questionnaire investigation. Then, these answers will be analysed and each argument‟s limitations will be discussed at the end of each section in Evidence and Analysis. Finally, the hypothesis will be either verified or rejected, leading in this way, to the conclusion and to the answer for the research question including the presentation of limitations of this study.

Giffen goods are goods for which the law of demand does not hold (Blink & Dorton, p. 30) which means that the quantity demanded of a Giffen good increases when price increases. The law of demand states that consumers purchase more of a good or a service during a period the lower its opportunity cost relative to the price and vice versa, ceteris paribus (Byrns & Stone, p. 45). In other words, an increase in price cannot lead to the decrease in quantity demanded for a Giffen good as in Figure 1:

An increase in price from P to P‟ causes the quantity demanded of a Giffen good to rise from Q to Q‟. The upward-sloping demand curve shows the quantity of a good or a service an individual will consume at each price level.

Secondly, the price elasticity of demand (PED) for bus tickets is positive for a Giffen good. This means that a decrease in price causes a fall in quantity demanded of a Giffen good and vice versa for the increase in price. Secondly, the substitution effect and income effect work in opposite directions for a Giffen good, which implies that quantity consumed will change in the direction that of the change in price (Friedman, p. 90). Additionally, the income effect outweighs the substitution effect (Anderton, p. 69), which makes the demand curve upward - sloping as in Figure 1. This is a main difference between a Giffen good and an inferior good which substitution effect by contrast outweighs the income effect (Friedman, p. 90), thus a Giffen good is a unique type of inferior good (Blink & Dorton, p. 30).

Secondly, the consumption of a Giffen good decreases when income increases (Colander, p. 524). Consequently, its income elasticity of demand (YED) is negative (Byrns & Stone, p. 411) as can be seen in the next figure :

An increase in income from Y to Y‟ causes a fall in quantity demanded of a Giffen good from Q to Q‟

Lastly, there are three necessary preconditions for a Giffen good. Firstly, the good or the service in question must be an inferior good (Anderton, p. 69). Secondly, there must be a lack of close substitute goods. Thirdly, the good or the service must constitute a large percentage of the consumer‟s income, therefore, Giffen goods occur normally among poor people. This means that the consumers becomes so impoverished by a price increase of a Giffen good that one cannot afford to buy other goods or services and has to buy more of this good (Blink & Dorton, p. 30.)

My hypothesis is that bus tickets are Giffen goods for high school students in Tampere because many students in my school have no good substitutes for bus in Tampere. This again is because of the long distances and expensive good substitutes such as cars. Additionally, many students live alone and do not work because of the school, which suggests that bus tickets present a substantial percentage of the student‟s income. Hence, most students likely have to use a bus as they cannot afford to own cars or cannot have rides from their parents. However, there are also students who use cars instead of a bus as they have more income. This suggests that bus tickets are inferior goods as an increase in income leads to an decrease in the consumption. Finally, the factors which make bus tickets Giffen goods are summarised in the next figure:

There are only the factors which are assumed to make bus tickets Giffen goods in the figure.

The previous figure shows that bus tickets are Giffen goods because of lack of available substitutes and because they present a substantial percentage of an average student‟s income. However, the three main factors for Giffen goods which are going to be investigated are the income elasticity of demand, the law of demand and the price elasticity of demand which determines the type of a good or a service. All these factors must be in favour for a Giffen good. Finally, the research question for this study is “Are bus tickets Giffen goods for high school students in my school in Tampere, Finland?"

To test the hypothesis, a questionnaire was made in my school (Appendix 2 for data), where 64 students answered anonymously to the questions on the period from 21^th September 2007 until 8th October 2007. There were 61 respondents from Tampere and three outside Tampere. The questions were selected so that students could estimate their consumption currently and in the imagery situations where the price changed on schooldays and on weekends during a week (Appendix 3 for questions). The purpose of the survey was to establish their use characteristics in a week.

Firstly, the type of good of bus tickets will be investigated by the income level of students through questions about the residence and about the possible work besides school. This allows determining the YED for bus tickets when the quantities demanded are known. First, the respondents will however be divided into two income groups as exact figures about the income level were not available. Students who used a car for their school journeys and were living less than 6 kilometres from the school are in this study included to the high-income level. This is because they who used their cars could use cheap substitutes such as a bicycle or going on a foot. This means that the price of consuming their vehicle did not hurt their economic balance. Other students who lived 6 kilometres or more from the school despite the ownership of a car were included to the middle and low income levels.

Secondly, the law of demand and the PED for bus tickets will be examined with the data about consumer responses to the price changes. The price changes in a range from 0.5€ to 5.0€ as the base price is 1.0€. This time, only students who lived more than 6 kilometres from my school and whose school journey spent more than 20 minutes were considered because they who lived close to the school did not need to use bus for their bus journeys. The school distance and the duration of the school journey were directly asked from the students. Furthermore, students who came to the school usually on a bus were only considered in this section of analysis. Lastly, since there were different bus cards of different prices for them from Tampere and outside Tampere, only students from Tampere were considered. The type of a bus card was determined by the respondents‟ payment method on a bus. These restrictions in the survey were to ensure that the ceteris paribus condition holds because many variables such as the availability of substitutes for bus tickets changes along the school distance and along respondent‟s ownership of a car.

Now, students‟ YED for bus tickets in my school during a week both on schooldays and on weekends will be investigated to ensure that the days of the week do not alter the results. Furthermore, the average or mean consumption of bus tickets per person will be examined by a mean formula (Cirrito, Buckle & Dunbar, p. 461) (Appendix 4). This allows determining the type of good students‟ bus tickets are in my school.

There are the results which concerns only the average week consumption of bus tickets and the amount of respondents in this figure. The results are calculated by the mean formula.

The data of figure 4 suggests that bus tickets are inferior goods. This is because the quantity demanded of bus tickets decreases as the income increases. For example, an average high-income student demands smaller quantity of bus tickets (1.4) than an poorer student (11.4) at the price of 0.5€ on schooldays (1.4 < 11.4) as is illustrated in Figure 5:

The figure is based on the data of figure 4 and shows the data on schooldays in a week.

There was only one exception in data of figure 4 on weekends at the price of 5€ when both income groups demand the same amount of bus tickets (1.0) per person. However, the fact that high income people demand less bus tickets than lower income people in the data in figure 4 means that an increase in income decreases the quantity demanded of bus tickets, thus bus tickets are inferior goods which is the first criteria for a Giffen good.

The assumption made about students who come to the school by a car are at the highincome level has its restrictions: a car is not necessarily a sign of high income. For example, students who come to the school by a car can have regular rides to the school from other people such as their friends, which means that they themselves do not have a car. In this study, they were registered to the high income level. In contrast, this assumption has another shortcoming which underestimates the income level. For instance, some students who lived near the school at that time may have had a car but they were not using it in their school journey. Consequently, their income level should be higher than it was recorded. In conclusion, some students were considered at the higher income level whereas some others at the lower income level. Exact figures about current income and permanent income should be known to investigate this variable more accurately. This sort of information is however hard to obtain in the public investigation. Secondly, there were only 8 respondents at the high-income level while 56 respondents at the lower income level, thus an increase in the amount of respondents may had provided better results at high income level.

This section considers only 53 students who were from Tampere and did not use a car for their school journeys. Their weekly quantities demanded of bus tickets are in the next figure:

The table shows data of 53 students from Tampere on schooldays and weekends in a week.

The data of figure 6 suggests that bus tickets are not Giffen goods for high school students in my school in Tampere in the studied periods. The argument is that students‟ demand of bus tickets in my school follows the law of demand both on schooldays and on weekends: the demand curves are downward-sloping for both periods. For example, an increase in the price (1 2) has decreased the quantity demanded (75\(\rightarrow\)56) by \((\frac{75-56}{75}× 100)26\%\) on weekends whereas on schooldays (435 \(\rightarrow\) 394) by \((\frac{435-394}{435}× 100)10\%\) which is a relatively smaller decrease (10% < 26%) in the quantity demanded than on weekends as shown in the next figure:

As discussed earlier, this section only considers students who came to the school usually on a bus and were from Tampere. To verify that student‟s bus tickets in my school are not Giffen goods, students‟ PED values for bus tickets are calculated by a Midpoint formula (Appendix 4) (McEachern, p. 425), which solved the problem called the end-point problem (Colander, p. 512). This problem occurs when the percentage changes in the price and in quantity demanded differ depending on whether the change is a rise or a decline but in the next data this problem is taken into account:

There are the results of 53 respondents on schooldays and on weekends in a week as 1€ is the base price for the changes in price in the figure. The PED values are calculated by the Midpoint formula in this figure as the price per a bus ticket changed from 1€ to other prices.

All PED values are negative in figure 8, which means that there is an inverse relationship between price and the quantity demanded (Blink & Dorton, p. 50). Therefore, this data confirms that bus tickets are not Giffen goods for high school students in my school in Tampere. The argument is that the negative PED values mean that the income effect does not dominate substitution effect (Friedman, p. 90).

Finally, the hypothesis made before will be considered, and the research question of this essay: “Are bus tickets Giffen goods for high school students in my school in Tampere, Finland?” will be answered now.

Three conclusions were made from the data collected and analysed. Firstly, bus tickets are inferior goods because an increase in income caused a decrease in the quantity demanded for students in my school. This is not however enough for a Giffen good. Secondly, bus tickets follow the law of demand as an increase in price decreased the quantity demanded and a decrease in price increased the quantity demanded. Lastly, students‟ price elasticity of demand turns out to be negative in the investigated price range. Consequently, the main idea of the original hypothesis is not supported: bus tickets are not Giffen goods in the examined consumer group of high school students in my school in Tampere. The benefit of this result is that it convinces that such goods which demand is upward-sloping seem not to exist, not even in the studied consumer group of high school students. It is very likely that this result could be generalised and applied into other situations although the findings of this study reflect students‟ consumer behaviour for bus tickets in Tampere and during the autumn 2007. However, it is possible that these results could not be generalised in certain time periods and in certain conditions. Next, the following figure summarises the reasons for the conclusion:

The main factors which make bus tickets Giffen goods are on the right hand.

The investigation also raised two new questions as indicated by the question marks in the previous figure. The first question is: “Do students‟ bus tickets have substitutes in Tampere, Finland?” It seems after the investigation that on autumn generally students have substitutes for bus tickets such as a bicycle or going on foot at least. The other question is: “Do students‟ bus tickets present a substantial percentage of the student‟s income?” It seemed that students did not care much about the price of a bus ticket overall as the demand for bus tickets was very inelastic (See in figure 8). This can be explained by the fact that 67%\((=\frac{43}{64})\) of students‟ parents paid students‟ all bus journeys as only 8% \((=\frac{5}{64})\)of parents did not pay anything (Appendix 4).

At the same time, though, there are some limitations to this study. Firstly, a longer period and more respondents in the investigation could had provided better results to verify the findings of this essay. Secondly, a specific student group of a certain background could be investigated. For instance, there was one who seemed to have Giffen behaviour in the investigation of 64 students. She was observed to be a Chinese immigrant student who used bus for her school journeys and seemed not to have substitutes as her school journey spent roughly 45 minutes in one direction on a bus. This is an interesting result as she was one of the few immigrant students in the study and from China because economists Jenson and Miller (2007) have shown that Giffen goods may exist in the form of rice or noodles, in different regions of China. This is mainly because of poverty, which is likely also the reason for the exception found in this study. This factor could be probably better examined by the new research question: “Are bus tickets Giffen goods for immigrant students in my school in Tampere, Finland?” A small sized but focused investigation would be enough in examining this factor. As there was only one exception in the data, it is possibly that the respondent was not honest in answering the questions. Furthermore, the results suggest that a good or a service cannot be Giffen but the consumers behaviour in a particular situation instead might be. This Giffen property might be more depended on the factors such as wealth, current income, and possibly somehow on students cultural background.

There are also limitations in the assumptions made as discussed before in Evidence and Analysis. The assumption that students who come to the school by a car are at the highincome level has its restrictions: a car is not necessarily a sign of high income. Additionally, this assumption has another shortcoming which by contrast underestimates the income level. For instance, some students who lived near the school at that time had a car but they were not using it in their school journey. Consequently, their income level should be higher than it was measured. In conclusion, some students were considered at the higher income level whereas the other at the lower income level. Exact figures about current and permanent incomes are needed to investigate this variable more accurately. This sort of information is however hard to obtain in the public investigation. Consequently, there was an unresolved question raised in the research: How do current and permanent incomes affect on the high school students‟ quantity demanded of bus tickets in my school in Tampere, Finland? This is important because the ceteris paribus assumption must hold in order to be able to investigate the existence of Giffen behaviour. It can be that the permanent income affects more on the consumer behaviour than the current income.

In economic concepts, the assumption of ceteris paribus is a device for looking the relation between two variables when also other variables matter (Begg, Fischer & Dornbusch, p. 25). To be a true Giffen good, price must be the only factor which changes to alter the quantity demanded, and conspicuous consumption cannot enter the picture. This was not guaranteed in this research where there were obviously numerous factors which were changing and influencing the results. For example, bus tickets could be Veblen goods for her who seemed to have Giffen behaviour in which case she would have seek status for the consumption of more expensive bus tickets. This is an example of the main source of the error which implies that Giffen behaviour can be investigated only to the extent that the underlying ceteris paribus assumptions can be maintained. Ultimately, this essay obtained its goal as it answers the research question and also pinpoints a new research question.

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Thank you to my extended essay supervisor and teacher