Three AEs for a basic supply-demand case on NYC taxi market
Summary
CollapseContext for Use
Overview
These three short AEs relate to the article "Taxi Medallions, Once a Safe Investment, Now Drag Owners Into Debt" (New York Times Sept. 10, 2017) that students should read and supply responses to JITT questions before the class period.
The case explores events in the market for taxi rides in New York City following the entry of Uber and Lyft.
Students gain mastery manipulating the S-D model and begin to apply the model to gain an improved understanding of current events.
The first AE requires students to confront a common basic error: confusing causes and effects of price changes.
The second AE relates the understanding that comes from the S-D partial equilibrium model to the production possibility curve general equilibrium model that is usually studied in the unit prior to the introduction of supply-demand analysis in most principles of microeconomics texts. This AE also requires students to confront a common misconception for beginning students, for newspaper journalists, and for politicians; namely, that resources released from a contraction in one sector do not remain idle for long in a well-functioning economy. Rather, the resources are often absorbed quickly into other sectors, especially when expanding sectors use factor inputs that are very similar to the ones released by the contracting sector.
The final AE of the three asks students what changed to enable the entry by Uber and Lyft. The answer is not necessarily all that clear but students learn a lot by exploring the question.
Expected Student Learning Outcomes
Upon successful completion of these application exercises, students will be able to
Apply supply-demand analysis to analyze current events.
Explain how resources freed from use in a contracting sector come to be employed in expanding sectors.
Discuss how technological or regulatory change can create opportunity for increased competition in a sector of the economy.
Information Given to Students
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Innovation in the NYC transportation sector
The New York Times article "Taxi Medallions, Once a Safe Investment, Now Drag Owners Into Debt" (Sept. 10, 2017) describes a drastic reduction in the price of operating a taxi in New York City.
Based on analysis by means of the supply-demand model, would you predict a shift toward riding taxis and away from other modes of transportation?
Yes, riding taxis will now be a less expensive way of moving people around NYC than it was before.
No, the fall in the price of the taxi medallions is the result of a prior market event in which firms successfully pursued innovation rents.
No, the subway remains a much cheaper way of moving people around NYC.
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Innovation in the NYC transportation sector II
The New York Times article "Taxi Medallions, Once a Safe Investment, Now Drag Owners Into Debt" (Sept. 10, 2017) describes a drastic reduction in the price of operating a taxi in New York City.
What do you expect to happen to the taxi drivers who were displaced by innovation in the transportation sector?
The former taxi drivers will probably remain unemployed indefinitely.
The former taxi drivers -- mostly immigrants -- will probably return to their native lands.
The former taxi drivers will probably become Uber and/or Lyft drivers.
The former taxi drivers will probably move out of the NYC metropolitan area to taxi driver jobs elsewhere in the United States.
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Innovation in the NYC transportation sector
he New York Times article "Taxi Medallions, Once a Safe Investment, Now Drag Owners Into Debt" (Sept. 10, 2017) describes a drastic reduction in the price of operating a taxi in New York City.
Which of the following events was most important in creating the opportunity for Uber and Lyft to enter the car transportation market in NYC?
Smart phone data rates fell.
Smart phones became ubiquitous.
Cities relaxed regulations protecting taxis from competition.
Other event. (Teams choosing D must be ready to describe the other event.)
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Teaching Notes and Tips
No prefatory remarks need be made beyond reminding students that reporters are expected to support their answers with the appropriate supply-demand analysis.
In the summary remarks for the first AE, be sure to point out the difference between a movement along a demand curve as the price of a service falls and the result of a fall in the demand for a service. Students should have arrived at the correct answer in the debriefing process but it helps to make a crystal clear short exposition at the conclusion of the exercise.
If you have a class that has finished the unit on production possibility curve analysis earlier in the course, you can suggest that they refer to that material in their support for their answer to the second AE in this sequence. Again, a quick summary of the correct model is useful. In the debrief, try to get students to explain the circumstances in which displaced taxi drivers will have an easy time finding other work and those in which they will not. In your summary remarks, you can elaborate on this idea if you choose.
The third AE is useful for leading students to think more deeply about events in the economy. There is a bit of uncertainty about the answer, though it seems that the technology change seems the best answer. Regulatory change often followed the entry of Uber and Lyft but other forces opened the door for those companies to enter. One might get a D answer supported by specifics from the article. That would be awesome. I let students consult the article in class on smart phones, tablets, or laptops. Or you can remind them to print it out and bring it to class if you have a tech ban. JITT questions beforehand can lead students to the key information in the article and the basics of applying S-D to the case on their own before class.