(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 337

312 PART • Producers, Consumers, and Competitive Markets supply elasticity will be positive but finite Because industries can adjust and expand in the long run, we would generally expect long-run elasticities of supply to be larger than short-run elasticities The magnitude of the elasticity will depend on the extent to which input costs increase as the market expands For example, an industry that depends on inputs that are widely available will have a more elastic long-run supply than will an industry that uses inputs in short supply E XA MPLE 8.7 THE SUPPLY OF TAXICABS IN NEW YORK The price of a taxi ride depends, of course, on the distance Most cities regulate the fares that a taxicab can charge, and typically the price of a ride begins with a fixed fee to enter the cab, and then a charge per mile driven In 2011 there were 13,150 taxicabs operating in New York City One would expect that if fares went down, fewer drivers would want to operate cabs and the quantity supplied would fall Likewise, one would expect that if fares went up, more drivers would want to operate cabs and the quantity would increase Let’s see if that’s right Driving a cab is not an easy job Most drivers work a 12-hour shift six days per week What annual income can the driver expect to earn? Assuming the driver works 50 weeks per year, the total hours worked will be 11221621502 = 3600 hours per year But part of that time is spent waiting at a cab stand or cruising for passengers; only about 2/3 of the time will there actually be a paying passenger inside, i.e., about 2400 hours per year Driving about 10 miles per hour (remember, this is New York), the cabbie will drive about 24,000 “paid” miles per year Some rides are longer than others, but the average taxi ride in New York is about miles, and (in 2011) the average cost was about $12.60 on the meter, or about $15 with tip Based on 5-mile average trips, the driver will therefore make about 124,0002>152 = 4,800 trips and earn a gross income of 1$152 14,8002 = $72,000 per year From this, the driver must pay for gas, insurance, and maintenance and depreciation on the cab, which can add up to $10,000 per year But that is not the only cost As in most cities, driving a taxi in New York requires a medallion The medallions, which were issued by the city, are owned by taxicab companies The companies lease the medallions to drivers at a rate that is also regulated by the city: $110 per 12-hour shift Driving shifts per week and 50 weeks per year, the cab driver must therefore pay an additional 162 1502 11102 = $33,000 per year to lease the medallion This leaves the driver with a net income of only $72,000 - $10,000 - $33,000 = $29,000 per year Suppose New York City reduced the fare schedule, so that a 5-mile trip only brought the driver $10 instead of $15 Then the driver’s annual gross revenue would drop from $72,000 to $48,000 After covering the costs of leasing the medallion as well as gas, etc., the driver would be left with only $5,000 of net annual income Under those circumstances, hardly anyone would want to drive a cab And now suppose that New York instead raised taxi fares so that a 5-mile trip brought in $20 instead of $15 Now the driver’s annual gross revenue will be $96,000, and his net income after expenses would be $53,000 That’s not bad for a job that requires little education and no special skills, so many more people will want to drive cabs Thus we would expect the supply curve for taxis to be very elastic—small reductions in the price (the fare earned on an average five-mile ride) will cause a sharp reduction in quantity, and small increases in price will cause a sharp increase in quantity (the number of operating taxicabs) This is illustrated by the supply curve labeled S in Figure 8.20 Something is missing, however While reducing fares will indeed cause a reduction in the quantity supplied, raising the price will not cause an increase in the quantity supplied Why not? Because the number of medallions is fixed at 13,150, roughly the same number that were in circulation in 1937 By refusing to issue more medallions, New York effectively limits In some cases the opposite is true Consider the elasticity of supply of scrap metal from a durable good like copper Recall from Chapter that because there is an existing stock of scrap, the long-run elasticity of supply will be smaller than the short-run elasticity