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. The price they face is determined by the interaction of demand and supply in the whole market. That is what we call ‘price mechanism’. There are a lot of transactions between buyers and sellers in the market, individuals pursuing their own self-interest and aim to maximize utility; companies provide goods and services by the aim to make profits, each seeking their own interest. Price mechanism coordinate these transactions and in such a way to make everyone better off. Market price serves as an “invisible hand” guiding resources to their most efficient uses. In this situation, all firms regard themselves as price-takers because each of them owns an insignificant proportion of totally industry supply and they are too small to affect price by changing their supply. Besides, there are no barriers to entry and exit for the firms in the long run. So consumers have plenty of choices among suppliers of that product. Consumers have perfect information about the prices that sellers charge in the market. Therefore, in the mind of the buyer, each firm’s product is viewed as a perfect substitute for the product of any other firms in the market. This ensures that no buyer has any economic incentive to pay any firm higher price for the product than is charged by other firms because buyers will compare the prices and find out which firm would charging them less for an identical product.