Chapter 3, Problem 1QFT

To determine

To explain:

Method of fixing prices in market before the introduction of Uber cab service and whether it was a competitive market.

Concept Introduction:

Competitive Market:

When a large number of buyers and sellers interact with each other for their own incentive it is referred to as a competitive market. Price is determined by the aggregate demand and aggregate supply of the market, no single seller or single buyer can determine price in the competitive market.

Explanation of Solution

The cab market in New York City was competitive before the Uber cab service because the regulators set the price according to the demand and supply of the market and the taxi drivers follow these prices. If the market is not competitive then the taxi drivers would have to set their own prices and would not follow the market price. Thus, there were large number of sellers and the large number of buyers.

During the good weather conditions, drivers anticipate that there would be high demand therefore, enough cabs are supplied. Whereas, during bad weather drivers anticipate that there would be very low or even no demand therefor, they reduce the supply by themselves.