Suggested Answers of BT2 Revision Package - ASKnLearn

(3) 2011 JJC Prelim H1 Paper Q3Taxi fares are going up at an additional 50 cents per ride due to an increase in fuel prices.Land Transport Authority of Singapore has increased the number of taxi licenses granted inthe midst of a stronger economy. In the same year, the car COE prices hit a 14-year high.Adapted from The Straits Times, 2011(a) Account for the fare increases in the taxi market. [10](b)Explain the concepts of price elasticity of demand and supply, and discuss therelevance of price elasticity of demand of Premier Taxis Company in maximising itsprofits. [15]Suggested answer (a)The taxi fare is determined by the interaction of demand and supply of taxis. Demand is thewillingness and the ability of the buyer to pay a particular price for a particular quantity of agood while supply is the willingness and ability of the seller to offer different quantities of aparticular good at different prices.Possible non-price determinants of increased supplyThe Land Transport Authority of Singapore (LTA) has increased grants of taxi licenses to theall the taxi firms in Singapore, to increase the number of taxis on roads. This causes arightward shift of the supply curve to the right.Fuel prices hit a two and a half year high as a result of spiraling global crude oil prices spiral.As fuel is a factor input to operate the taxis. This increase in price of petrol leads to anincrease in cost of production. Taxi drivers will incur more cost when they increase theirnumber of travelling trips on the road. Due to the higher cost, the supply of taxis on the roadwill decrease quite significantly, causing a bigger decrease in supply leftwards.Net change in supplyWith the increase in fuel prices, taxi drivers may be more conscious of how much fuel they useand how efficiently they use fuel, they may be more selective over their destinations, chosenroutes, and times when they choose to drive, so as to avoid consuming more fuel thannecessary; but few taxi-drivers may consider stopping taxi-driving altogether, since it is afterall a livelihood for them; especially when the rise in fuel prices continues to increasesignificantly or rises sharply.Hence, the decrease in supply may be outweighed by the increase in supply of taxis, andoverall the supply of taxis will decrease, albeit by a small extent.