Question

Show graphically how each of the following will affect equilibrium price of electricity and why:

a. Consumers become more energy-conscious

b. A decrease in per capita income

c. A decrease in supply of electricity

d. A decrease in prices of energy resources (coal, oil and natural gas)

Answer 1

a) when consumers become energy conscious they spend less on electricity which leads to decrease in demand for electricity leading to decrease in equilibrium price from P to P'.

b) decrease in per capita income leads to decrease in purchasing power which leads to decrease in demand for electricity. This results in decrease in price to P'.

c) decrease in supply shifts the supply curve leftwards. At new equilibrium, price increases to P'.

d) decrease in price of resources of elasticity leads to decrease in cost of production. Lower cost of production leads to increase in supply from S to S'. At new equilibrium price decreases to P'.