there isnt someone in an Uber control room in Colombo turning surge pricing off and on

it happens with Ubers pricing algorithm (patent-pending) that reacts automatically to

demand.

Why uber surge the price?

Given that driver-partners that work with Uber are free to enter and exit the
market whenever they wish, there can be a fair amount of variability in supply. So when
demand is high, Uber would want more and more drivers to come on board and start
driving. Using prices to signal this to drivers is, according to economic theory too, a good
way to influence supply by inducing more drivers to get on the road and meet the new
demand. So, when surge pricing kicks in, it signals to drivers that its now a valuable time to
be on the road. Drivers that may have clocked off by then or were not driving that day may
be induced to enter. Meanwhile, on the riders side, more riders seeking Uber rides can get
one albeit at a higher price and some riders may choose not to and seek other options
instead.

It also demonstrates a fundamental economic tenet of allocative efficiency, by allocating

rides to those who value it the most those people who place a higher monetary value on
an Uber ride home after a NYE party (and willingness to pay).
Uber says,

Our goal at Uber is to ensure you can push a button and get a ride within minutes even on the
busiest nights of the year. And due to surge pricing, thats almost always possible.

The company claims that surge pricing really improves their ability to deliver rides to those
who request it. In a case study of NYE in 2014 in New York when the surge pricing system
failed for about 26 minutes, research showed that less than 20% of ride requests were
completed or fulfilled, whereas when surge was active, 100% of ride requests were
completed. This, they argue, is vindication of employing surge pricing the market clears
i.e., all those requesting a ride get to take one.

Why is this particularly important on a night like NYE?

Because more drivers (than normal) would be more reluctant to work because of the value
of the next best alternative foregone which may be leisure staying at home with family;
seeing fireworks at Galle Face Green; going for a party with friends; watching Homeland
and sleeping early; babysitting a firework-wary pet, etc. This, then, is a classic explanation
of marginal cost of production/supply or opportunity cost of supply the opportunity cost
of driving on NYE is of staying home or going for a celebration. We must also consider the
connection to another economic concept of reservation wages or reservation prices
that there is some level of wage (or price of a ride, in this case) below which a driver doesnt
think its worth it to forego whatever else he/she was doing, and get on the road and seek
hires.
Explain the diagram Diagram 1 below shows a market clearing condition, when demand
and supply are at regular levels. Lets say, the afternoon of the 31st December. All riders
who open up the app and request a ride are able to get one within a reasonable time, as
any other time. Equilibrium price and quantity is at e. Price is the same at P*.