• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

What happened to the income of taxi drivers, and fares paid by consumers in East and West Berlinafter unification, given that living standards are much higher in West than in East Berlin. Assume the market for taxi cabs is competitive.

Extracts from this document...

Introduction

Essay Title: Before the collapse of communism, Berlin was a divided city. After the Berlin wall came down, movement between East and West became possible. What happened to the income of taxi drivers, and fares paid by consumers in East and West Berlin after unification, given that living standards are much higher in West than in East Berlin. Assume the market for taxi cabs is competitive. Before the collapse of communism, Berlin was a divided city. After the Berlin wall came down, Germany got reunited and the fall of the Berlin Wall leads to the absorption of a command economy by a free-market one, In this essay, I will analyse how the competitive market for taxi cabs and the income of taxi drivers has changed, given that living standards are much higher in west Berlin than in East Berlin. Perfect competition is a market structure where firms have no power to affect the price of the product. ...read more.

Middle

the short-run, On the other hand, the living standard was much higher in West than in East Berlin before the wall collapse, so the taxi fare must be neutralised so as to lessen the difference. Thus for West Berliners, the taxi fare decreased and the demand for taxi cabs increased dramatically, but West Berlin's taxi drivers would rather look for other careers because it is no longer profitable for them. For Easter Berliners, taxi fares were too expensive for them and 'taxi driver' became a popular career. Figure 1 Figure 2. Source: http//www.tutor2u.net/decks/econdeck50.asp Since each taxi firm or driver is a price taker in a perfectly competitive market, the demand curve is perfect elastic: Demand=Average Revenue (Taxi Fare)=Marginal Revenue (Figure 1), price acts as signals to help the process of resource allocation. 'If the average cost (AC) curve dips below the average revenue (AR) curve, the firm will earn supernormal profit.'(P123 Sloman, 2001), the supernormal profit is the yellow shaded rectangle in figure 2. ...read more.

Conclusion

There was an excess demand for taxi cabs, so taxi fares went up and taxi drivers could earn a lot of profit from it. But in the long run where the market of taxi reached equilibrium, driving taxis became not so profitable since the living standards went up and 'no barrier to entry' made people from other industries join the taxi market, it would lead to excessive supply. When most firms in a market are price takers, there is only small difference among the prices of identical products within the market. Competition thus drives an improvement in economic welfare and efficiency. 'Competition forces under-performing firms out the market and shifts market share to more efficient firms in the long run, also it encourages firms to innovate and adopt best-practise techniques.' (http://www.tutor2u.net/decks/econdeck50.asp) Since competition of taxis got fiercer, some low-quality taxis were no longer profitable, so they would probably face bankruptcy and then quit the market. In that case, taxi fares remain the same and will only increase with the inflation rate, so as the income of taxi drivers. Therefore, as long as the equilibrium price is charged, the market would perform in its right way. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Here's what a teacher thought of this essay

4 star(s)

****
This is a very hard topic and question for GCSE level and on the whole the writer does well with it. They use the theory well and apply it to taxi drivers consistently. There are a few errors which is understandable given the complexity of the subject.

Marked by teacher Dennis Salter 01/05/2013

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Economy & Economics essays

  1. Peer reviewed

    Price Discrimination Essay

    4 star(s)

    The conditions necessary for a monopolist to be able to use price discrimination effectively are: * The monopolist must face different demand curves from separate groups of buyers (the elasticity of demand of buyers must differ). If all buyers had the same demand curve, then the monopolist could not charge different prices to buyers.

  2. How do economic systems solve the problem of scarcity?

    Some sector of the economy, which are considered more critical, could be under government control where as most of the other sectors could be left for the private individuals to determine. The United Kingdom and France are examples of a mixed economy though both are more towards free market economy of the spectrum.

  1. WHAT IS THE IMPORTANCE OF PROFIT MOTIVE IN MARKET ECONOMIES

    Therefore, precious resources get used in the production of luxury goods, while even basic necessities are not fulfilled. E.g. money is spent on making perfumes, while food and clothing is not available to many 2. Neglect of moral values: the profit motive becomes so strong that firms go through any means to achieve their profits and make money.

  2. The Role of the Informal Sector in the National Economy.

    In spite of all the measures taken by the Government to bring about economic and social development, this development was not percolating down to the masses fast enough. Due to the pervasive effects of the globalizing economy, population growth and urban migration, the active labor force was growing at a

  1. Discuss whether economic efficiency as described in text books is likely to be able ...

    It is a more abstract concept as it involves personal views on efficient levels of output. For examples, firms in free market system are likely to produce goods and services for the people who are able to pay for the goods.

  2. Economics - Classical School of Thought, Keynesian School of Thought, Supply Side School of ...

    Theories: Classical theories mainly revolves around the role of marker markets in the economy, according to these theoriesy if the market worked freely the economy would prosper. Any imperfections in the market that prevent the hinders this process should be the responsibility of the government to deal with.

  1. Main characteristics of free market economy

    market system. A Centrally Planned Economy (Command Economy) is an economic system where the government controls and solves the basic economic problem of "what, how, and whom to produce". Unlike a Market economy the state owns and allocates the factors of production (land, labour, capital, entrepreneurship)

  2. What is the economic system?How does Australia's economic system attempts to solve the economic ...

    The level of control that the government assumes within a mixed economy leads to the government having a major role in the delivery of its own services. At the same time, the private sector will have an important role in helping to build government infrastructure to deliver these services.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work