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

312 PART 2 • 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. 9 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 5 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

9

at a rate that is also regulated by the city: $110 per
12-hour shift. Driving 6 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 2 that because there is an existing stock of scrap, the long-run
elasticity of supply will be smaller than the short-run elasticity.