The ceiling price for the taxis in the regulated market has been fixed at $2.50 per kilometer. This price is referred in the diagram as the shortage price. The quantity (i.e. the number of taxis) for the shortage price is referred as the shortage quantity. The equilibrium price is $3 per kilometre and is referred as the equilibrium price in the diagram. The quantity (the number of taxis) corresponding to the equilibrium price is the equilibrium quantity. With the price being lower than the equilibrium price, there is a shortage of quantity. Therefore, with lower price ceiling compared to the equilibrium price, there will be lesser number of taxis or in other words, there will be shortages of taxis compared to the equilibrium quantity. This is not good for the consumers.
d) In case of Uber, the equilibrium point between the demand and supply at the regular price is denoted with A. When the regular price is increased to the surge price, a demand curve is formed to the right of the old demand curve. The new equilibrium between the demand and the supply is formed at the point B. The quantity for Uber increases when the surge price is raised. Therefore, the consumers will be better off when the surge price is applied to the Uber taxis.
The industry is the price maker shown on the left diagram. The price (P) is determined in the equilibrium point between the demand curve and the supply curve. The quantity demanded is Q. When the supply increases, the supply curve shifts to the right. This lowers the price to P1. At the same time the quantity demanded increased to Q1.
The individual firms are the price taker as shown in the diagram located on the right. Then normal profit in the perfect competition is possible only in the long run. The price here is determined where the price and the MC (Marginal Cost) intersect at the point A. Here, the AR (Average Revenue) is equal to the MR (Marginal Revenue). The corresponding quantity demanded is Q. When the supply curve shifts, the new price (P1) is determined at the intersection point of ATC (Average Total Cost) and MC (Marginal Cost). The new quantity demanded is Q1. Therefore, in the individual firm level, both price and the quantity demanded decreases when supply increases.
In the perfect competition, as the population deceases drastically, the demand for taxis will also diminish. Since, taxi drivers were safe and there is no reduction in the taxi drivers, the market supply remains the same. The market demand has reduced from MD1 to MD2. Consequently, the price is reduced from P1 to P2 and the quantity demanded also gets reduced from Q1. With respect to the costs and revenues of the individual firms, the revenue is reduced and so are the costs.
When weather condition revives back to normal, the taxi drivers still cannot quit the business. It can be presumed that majority of the taxi drivers have taken loans to fund their purchase of the vehicles. If they quit their business, their revenue will dry up as well as their future revenues. In such as situation, the taxi drivers will not be able to repay their dues to the lender. Even for the taxi drivers who used their capital to buy taxis, their capital cannot be recovered if they quit the business.
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