Question

To legally operate a taxi in New York City, a driver must have a medallion issued by the New York City Taxi and Limousine Commission, an agency of the city's government. In 2017 the number of medallions was 13,587 . In recent years the taxi industry in New York and other large cities has encountered competition from companies such as Uber, an app-based service that offers rides from drivers who own their own cars. Uber varies the prices it charges based on the demand for rides, with rides during busier periods, such as Saturday nights, having higher prices. a. What does the limitation on their number imply about the price elasticity of supply of taxi medallions? b. Is the supply of Uber rides more or less elastic than the supply of taxi rides in New York City? Briefly explain.

Short answer

a. The limitation on the number of taxi medallions signifies that the supply of taxi medallions is inelastic. b. The supply of Uber rides is more elastic in comparison to the supply of taxi rides in NYC due their ability to adjust the supply depending on demand.

Step-by-step solution

Understanding Price Elasticity of Supply for Taxi Medallions

First, understand that price elasticity of supply is how responsive the amount of goods supplied is to a change in the price. The limitation on the number of taxi medallions means that even if the price of medallions escalates, the supply of medallions will not increase since it is limited by the government. This suggests that the supply of taxi medallions is inelastic, i.e., it doesn't change significantly with changes in price.

Understanding Price Elasticity of Supply for Uber

For Uber, there is no limit on the number of cars that can be connected to its service, and their pricing model allows them to respond to changes in demand, adding more drivers to the stream as needed. Thus, the price elasticity of supply for Uber rides is more elastic, as supply can adjust to changes in demand much more easily than it can with traditional taxis.

Comparing the Elasticity

With the information gathered in steps 1 and 2, it can be said that the supply of Uber rides is more elastic than the supply of taxi rides in New York City since the quantity supplied can change more readily in response to changes in price.

Key concepts

Taxi Medallions

Taxi medallions are essentially licenses that allow drivers to legally operate taxis in specific areas, notably New York City. They are issued by the New York City Taxi and Limousine Commission and are finite in number. This scarcity makes them highly valuable.
The concept of elasticity comes in here. Because the number of taxi medallions is fixed, they exhibit price inelasticity. This means that no matter how much the demand increases or the price for medallions rises, the supply remains unchanged.
This inelasticity can lead to dramatic price increases during periods of high demand since no additional medallions can be issued to meet this surge.

Uber

Uber operates distinctly from traditional taxis as it uses an app-based system to manage and dispatch rides. This platform connects passengers with drivers who use their own cars. The flexibility in how Uber operates is integral to understanding its elasticity.
Unlike traditional taxis which require a medallion, Uber can quickly scale the number of drivers on the road in response to changing demand. This scalability indicates a highly elastic supply. When demand for rides spikes, such as during special events or peak travel times, Uber's pricing model incentivizes more drivers to provide their service, thus increasing supply to meet demand.
This dynamic model helps Uber balance supply and demand more effectively than traditional taxi services.

Supply Elasticity

Supply elasticity refers to how sensitive the quantity of supplied goods is to a change in price. It's a key economic concept and very applicable when analyzing transportation systems like taxis and Uber.
For Uber, the supply is deemed very elastic. The company can increase the number of drivers almost instantly with rising demand thanks to their mobile platform. On the other hand, taxi services are less nimble. Bound by fixed numbers of medallions, they cannot readily increase supply even when there's a market need.
Understanding supply elasticity helps to contextualize why Uber has rapidly become a dominant force in urban transport. Its elasticity allows it to adapt to market changes swiftly, maintaining competitive service levels.

New York City Taxis

New York City taxis have long been iconic, with their characteristic yellow color and reliance on medallions. Despite their prominence, the capped number of medallions and lack of price flexibility have been challenging points.
The traditional taxi model in New York City is illustrative of an inelastic supply. With a fixed number of medallions, taxi companies face difficulties rapidly adapting to changes in consumer demand. Unlike Uber’s flexible model, NYC taxis cannot vary their supply easily, resulting in potential shortages and customer frustrations during demand booms.
This rigidity in supply highlights why alternative services like Uber have become increasingly popular—potentially offering more availability and dynamic pricing that aligns closer with passenger needs.