(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 338

CHAPTER 8 • Profit Maximization and Competitive Supply 313

P

S′

F IGURE 8.20

THE SUPPLY CURVE FOR NEW
YORK TAXICABS
If there were no restriction on the number of medallions, the supply curve
would be highly elastic. Cab drivers
work hard and don’t earn much, so a
drop in the price P (of a 5-mile ride)
would lead many of them to find another job. Likewise, an increase in
price would bring many new drivers
into the market. But the number of
medallions—and therefore the number of taxicabs—is limited to 13,150,
so the supply curve becomes vertical
at this quantity.

$20
S
$15

$10

13,150

the supply of taxis to be no greater than 13,150. Thus
the supply curve becomes vertical at the quantity

13,150 (and is labeled S’ in the figure).

Q

Many cities require taxis to have medallions and
restrict the number of medallions. You’ll find out
why in Chapter 9, when you read Example 9.5.

EX AMPLE 8. 8 THE LONG-RUN SUPPLY OF HOUSING
Owner-occupied and rental
housing provide interesting
examples of the range of possible supply elasticities. People
buy or rent housing to obtain
the services that a house provides—a place to eat and sleep,
comfort, and so on. If the price
of housing services were to rise
in one area of the country, the
quantity of services provided
could increase substantially.
To begin, consider the supply of owner-occupied housing in suburban or rural areas where land
is not scarce. In this case, the price of land does

10

not increase substantially as the
quantity of housing supplied
increases. Likewise, costs associated with construction are not
likely to increase because there
is a national market for lumber
and other materials. Therefore,

the long-run elasticity of the
housing supply is likely to be
very large, approximating that
of a constant-cost industry. In
fact, many studies find the longrun supply curve to be nearly horizontal.10
The market for rental housing is different, however. The construction of rental housing is often

For a review of the relevant literature, see Dixie M. Blackley, “The Long-Run Elasticity of New
Housing Supply in the United States: Empirical Evidence for 1950 to 1994,” Journal of Real Estate
Finance and Economics 18 (1999): 25–42.