Microeconomics Essay

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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…show more content…
The increase in the price of electricity is equivalent to an increase in the cost of production. The law of supply states that an increase in the cost of production will cause a decrease in the supply, provided everything else stays constant (Parkin, 2010).We can clearly see this in diagram C, when the price increased from P1 to P2, the supply curve shifts from S1 to S2, therefore decreasing the quantity supplied from Q1 to Q2. The equilibrium also shifts from E1 to E2. As time passes the mining industry will have enough time to adjust to the increase in the price of the electricity, which increased the cost of production. The supply curve of the mining industry will become more inelastic, this is because in the long run, the suppliers will find other more sufficient methods to produce gold with less energy. So when the price does increase again, the change in the quantity demanded will be affect much less. This is shown in Diagram C, when the S2 becomes S3, we can see that the supply curve is becoming more vertical, indicating that the supply curve is more inelastic. And in the long run, the only thing that changes is the elasticity of the supply curve, the quantity supplied and the equilibrium remains the same. 3 We can conclude the essay by stating that as the price increases for electricity, the demand for the electricity by the households will decrease
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