Managerial Economics and Tourism Industry in Australia

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Running head: Managerial Economics
Managerial Economics
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Managerial Economics
1. QUESTION ONE
a) Demand for Uber after severe storms Increases while its supply decreases as drivers are
unwilling to “get onto storm-ravaged roads and squeeze through traffic”. Assuming that
the market is perfectly competitive, if Uber were to charge the same price per kilometer
traveled irrespective of the circumstances then this would violate a rule of perfect
markets were the prices supposed to be flexible. Sellers and buyers are price takers and
forces of demand and supply determine the price.
A fixed price during periods after severe storms doesn’t prevent a shift in the demand
curve to the right from D1 to D2 that ought to increase the price from P1 to P2. However,
in our case the price remains fixed at P1 leading to a disequilibrium.
b) Surge pricing corrects the market and returns it to equilibrium. During busy times and
after storms, most Uber drivers may not wish to operate due to the congestion in the city
and may prefer to sit it out. This leads to a decrease in supply while the demand remains
the same or increases. To solve this glut, Uber drivers have to be given an incentive to
literally “weather the storm” by increasing their compensations. The demand shifts to D2
from D1to represent the new market equilibrium point with the new curve D2.

Managerial Economics
c) Surge pricing corrects market imperfections of either excess demand or supply. In our
case it corrects a decrease in supply which results in excess demand. For those who
would have gotten an Uber ride without surge pricing, the increase in price means they
are worse off although the increased supply results in shorter waiting time for the taxi
Uber. For the group of commuters who can only get an Uber ride after the surge pricing,
the measure is positive and means they are better off. Overall, both sets of commuters can
access the service due to the measure and are therefore better off.

Managerial Economics
As can be shown, surge pricing reduces the incident of excess demand and
maintains equilibrium.
2. QUESTION TWO
a) Demand for land in the cities continues to rise/increase over time. However, the
supply of the commodity (land) is fixed and actually decreases as more structures are
put up.
b) The demand for land in urban conurbations has increased in recent times while the
supply of the same is fixed. The demand curve has shifted to the right from D1 to D