Economics Homework: Disruptive Technology, Uber, and Price Elasticity

This economics assignment explores the concept of disruptive technology, defining it and providing examples like artificial intelligence and self-driving vehicles. It then analyzes the impact of Uber on the taxi market, comparing fares and explaining the differences using supply and demand model...Read More

Q1:
A. A disruptive technology is a relatively new term and has no spcific and precise definition. It is
commonly known as ‘a new emerging technology that unexpectedly displaces an established
one’(Fonseca, 2014).’ As the name suggests such a ‘disruptive’ technology often findsa place
by disrupting/ disturbing the existing technology. The newertexchnology is accepted easily
as it is more efficient and sometimes easy to adapt. It may not be a proven technology and
may lack experience, but its newness and uniqueness finds many takers. The word was
coined in 1997 in The Innovator’s Dilemma by Clayton M Christensen, a Harvard School
professor. (Clayton et al., 2015)
B. Since the first time this term was used in 1997, many innovations and newer technology
have been termed disruptive. Some of them died as they were not applicable on wider
levels, while others sustained and have nbeen used and improved over time consistently.
Two prominent and successful ones include:
Artificial intelligence is now finding multple users in fields as diverse as medicine, to robots.
Self driven vehicles are another disruption to driver driven cars. They obviate th eneed for
drivers and find applications in war ravaged areas where armymen can be saved from
landmines and enemy shootings, despite being able to deliver food, weapons and other
essentials to warring areas. The savings of labour involved in everyday driving and the scope
for zero accident deaths is another application that is pushing this technology further.
Answer 2:
i. The following fare is based on start point: Deakin College (Burwood) and end point :
Melbourne CBD.
Fare for a Silvertop taxi ride: $37
Fare for UBer X ride: $32-44
Source: SilverTopTaxi: ; Uber: https://www.uber.com/en-AU/fare-estimate/
ii. Notice that while a simple taxi gives exact values for the fare, Uber does not do that. It
gives a range because the actual fare depends on real conditions like traffic available
taxis and number of people looking for taxi, and the actual idling time. This way each
operator uses a different model that explains the different fares. Even when start and
stop destinations are same the fare vary due to :
Differences in model used. This model can be explained in terms of the determinants of
demand and supply of taxis. A simple taxi operator typically uses distance an time of the
day, along with car size ( perhaps) to determine fare. The model is static in nature. Uber
uses dynamic pricing model that updates demand and supply on real time basis.
iii. Using a simple demand supply model we have equilibrium at P* and Q*. With surpluses
as shown. The efficiency is maximum as welfare = sum of producer and consumer
surplus is maximised.

iv.
The introduction of UberX affects supply initially. As more drivers join Uber, the supply
of taxis will expand. The supply curve shifts downwards. We are now lower in prices and
more quantity of taxi rides in the market for tax rides. It is possible that demand also
increases as people want to experiment with a new service. But it is not clear if total
demand will rise or some simple taxi riders will shift to Uber. The effect on demand is
thus unclear and ambiguous. The supply effect is clear and expected and that is why we
talk about it.

The new lower price will improve consumer surplus, as part of initial producer surplus is
transferred to the consumer. The producer himself will benefit as his surplus expands
despite some transfer to consumer. The expansion in producer surplus is shown in red.
Answer 3:
i. Price elasticity of demand is defined as the (Csun.edu., n.d.) ‘ degree of
responsiveness of demand to price changes’. Demand can be elastic or inelastic
depending on the absolute value. A negative sign means that the good obeys the law
of demand; price and demand are inversely related. A value of -0.8 shows an
inelastic demand.
When we introduce UberX, elasticity changes to become more elastic as the value exceeds 1 now.
Price elasticity of demand depends on many factors, some of which are as follows:
 Elasticity is directly related to the number of substitutes available. Ifa good has more
substitutes its elasticity is higher as consumers have the option of shifting from consumption
of this good to substitute goods.
 The nature of the good affects elasticity. Luxury goods have elastic demand, while necessity
goods have lower and inelastic demand.
 The time period allowed to alter consumption also affects elasticity. If we are in the long run,
giving more time to consumers to alter their consumption due to price changes, demand will
be elastic. In the short run changes in consumption are tougher making demand inelastic.
The rise in elasticity for taxi rides is sensible and rational as UberX gives more choice/
substitutes to riders. This makes demand more elastic, as seen in a rise in its value from 0.8
to 1.2, keeping the negative sign intact.
ii. The diagram below uses a simple demand supply model, where the free market
price/fare is P*. Since P* is too high, a lower cap is fixed at P1. This causes a

deadweight loss or a loss of efficiency. It also creates shortage of taxis, where some
riders are forced to go without taxis as drivers refuse to take them at a fare of P1.
The riders who do get a taxi are happier as they pay a P1 that is lower than P*. Thus
some are happy and some are unhappy with P1. Overall society suffers.
Dynamic pricing is a system of setting prices using demand supply model on real time
basis. It’s dynamic nature refers to the constant changes in demnd and supply that are
incoporated in the system. This system can come up with a fare lower than P*, at some
time if demand is lower or supply is higher. The fare is not fixed at all, and changes very
time a rider requestan app. The fare is calculated the second demand is created/
generated via the app. There is no rrom for capping the fare here as actiual fare can be
lower than P* or even P1 at times. Since the fare is not fixed, there is no sense in calling
the fare high or low. (Dynamic pricing, n.d.)
In the diagram below we shows a fare of P2 determined by S2 and D2. This P2 is even
lower than P1. The new demand and supply curves are based on distance/route, idling
time and traffic conditions, and quantity of drivers available in the vicinity of demand
generated. This dynamic aspect of the system reduces deadweight loss as the fare is
determined by demand and supply with no interference from artificila caps/limits.

REFERENCES
Clayton, Christensen, C. M., Raynor, M. E., & McDonald, R. (2015). What is Disruptive Innovation.
Retrieved August 30, 2017, from Hbr.org: https://hbr.org/2015/12/what-is-disruptive-
innovation
Elasticity. (n.d.). Retrieved May 30, 2017, from Econ.ohio-state.edu: http://www.econ.ohio-
state.edu/jpeck/H200/EconH200L5.pdf
Fonseca, M. (2014). Guide to 12 disruptive Technology Examples. Retrieved August 29, 2017, from
Intelligenthq.com: https://www.intelligenthq.com/technology/12-disruptive-technologies/
Gallo, A. (n.d.). A refresher on price elasticity. Retrieved August 15, 2017, from Hbr.org:
https://hbr.org/2015/08/a-refresher-on-price-elasticity
Help.uber.com. (n.d.). Retrieved August 28, 2017, from Dynamic pricing:
https://help.uber.com/h/34212e8b-d69a-4d8a-a923-095d3075b487
Impact of Shifts in demand and supply. (n.d.). Retrieved June 3, 2017, from Econport.org:
http://www.econport.org/content/handbook/Equilibrium/Impact-.html
Price floors and ceilings. (n.d.). Retrieved August 24, 2017, from Econport.org:
http://www.econport.org/content/handbook/Equilibrium/Price-Controls.html
Supply and demand. (n.d.). Retrieved June 1, 2017, from SSC.wise.edu:
http://www.ssc.wisc.edu/~scholz/Teaching_101/Lecture3.pdf