Microeconomics Essay

Topics: Supply and demand, Elasticity, Price elasticity of demand Pages: 3 (1156 words) Published: March 15, 2013
Microeconomics Essay The price of electricity has increased substantially in the last three years, as a result of that; there have been apparent changes in the demand for electricity for the consumers and it has affected the producers supply market. In the following essay, we are going to look at the effect of the increase in the price of electricity in South Africa, using the supply and demand framework. The reason for the increase of the price of electricity is to balance out the supply and demand of electricity. The National Energy Regulators of South Africa (NERSA) has approved a 25% increase of the price of electricity for 3years starting from 2010 (Roodt, 2012). Supply and demand are fundamental principles of economics, it is what determines the price of goods in a competitive market. When NERSA approved of the increase in the electricity price, the price of electricity increased and the quantity of demanded for electricity by households decreased, we know this because the law of demand states that while other things remain the same, higher prices will lead to a lower quantity demanded (Parkin, 2010). Diagram A illustrates the immediate effect of the increase of price of electricity on the quantity demanded by households, i.e. the short run. In Diagram A and Diagram B, we are assuming that Eskom sets a single fixed price for all consumers of electricity, this assumptions implies that Eskom is able to supply an unlimited amount of electricity at a fixed price, and hence the horizontal supply curve. Diagram A clearly shows that before the increase of the price of electricity, the market was at equilibrium at E1 with a price of P1 and quantity of Q1, but when the price increased from P1 to P2. The supply curve shifted upwards from S1 to S2, causing an decrease in the quantity demanded for electricity, quantity demanded moves from Q1 to Q2, and reaching a new equilibrium at E2 with a higher price, but a lower quantity demanded. Because electricity is a...
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