Read the information here on New York City subway fare rates

Read the information here on New York City subway fare rates:
On February 17, 1996, The New York Times reported that subway ridership declined in the year after a fare increase. The fare was increased from 25 cents to $1.50. The paper measured the number of riders for December 1995 and compared that number to the number of subway riders in December 1994. The paper reported that ridership declined by 4.3 percent, nearly 4 million fewer riders. Answer the following questions.

How would you describe the supply curve after the subway price increase? Did it change? If so, why and how did it change?

How would you describe the demand curve after the increase in price? Did the demand curve move to the right or left, or shift up or down? Explain.

Estimate the price elasticity of demand for subway rides. Do you think subway fares are elastic? Why or why not?

What do you think happened to revenue when the fare went up? Explain your answer.

Solution

(a) After price of ride increased, supply was not changed. This is because the subway is a public good whose supply is pre-determined by the government. So there is no change in supply curve.

(b) After price increase, demand decreased by 4.3%. So, ridership follows the law of demand. There has been movement along the demand curve upwards, to reflect lower quantity demanded (Note: Since own price has changed, it\'s a movement along demand curve and not shift).

(c) Price elasticity of demand = % change in quantity demanded / % change in price

Here, % change in price = $(1.5 - 0.25) / $0.25 = $1.25 / $0.25 = 500%

So, price elasticity = - 4.3% / 500% = - 0.0086

Elasticity os extremely low. Since absolute value of elasticity is less than 1, demand is inelastic.

(d) When demand is inelastic, higher price increases total revenue. Here, demand is extremely inelastic, so total revenue will increase by a large amount.