October 2nd 2013
1. Suppose we are examining the market for Photovoltaic Residential Solar Panels (PVRSP’s). Consumers (buyers) of these PVRSP’s use them to generate electricity for their homes. Sellers of PVRSP’s are profit-oriented businesses (firms). Please use the model of supply and demand to analyze various market scenarios for PVRSP’s. Make the standard assumptions about the Laws of Supply and Demand, and also about the “determinants of demand” and the “determinants of supply.” Treat each scenario as a separate event.
Interpret basic scenarios: Within the PVRSP market, correctly identify the correct function (either the supply of, or the demand for, PVRSP’s) and the appropriate direction of change (increase or decrease), for each situation below. Illustrate each answer with a simple graph. Then, in a short paragraph, explain why it is a supply-side or demand-side change, and why the predicted change is an increase or a decrease.
a. PVRSP Scenario 1. The number of users [consumers] of PVRSP’s increases, because of publicity and advertising programs that have increased the consciousness of consumers to make investments in “green” technologies. These new customers prefer products that have a “smaller carbon footprint.” In simple terms, there is an increased popularity among residential consumers for PVRSP’s, and greater numbers of residential consumers decide to enter the PVRSP market. In this scenario, does the supply or the demand for PVRSP’s change? Why? What is the direction of change? Why?
Ans. Increase or decrease in the number of consumers will make the demand curve shift as the market is determined by the consumers. The demand for the product will also increase and vice versa if there is an increase in the number of buyers in the market. Therefore according to the given scenario, number of users for PVRSP’s increases due to the publicity and advertising programs. PVRSP being considered as a greener source to produce electricity, demand for the same increases. Therefore as the number of buyers increases demand increases too. Therefore this will cause the demand curve to shift to the right hand side.
In the above diagram X-axis points the quantity demand for PVRSP’s and Y-axis points the price for PVRSP’s. Considering D line as demand under normal condition and D1 is the shift in demand curve after increase in the number of users. It shows that as there is an increase in the number of consumers for PVRSP’s, its demand curve shift from original D curve to D1 in the right hand side.
b. PVRSP Scenario 2. A technological advance reduces the cost of production for PVRSP’s. Firms who manufacture PVRSP’s can now make their PVRSP product more cheaply. In this scenario, does the supply or the demand for PVRSP’s change? Why? What is the direction of change? Why?
Ans. Improvement in technology is one of the key determinants that shift the supply curve. Due to the improvement in technology, cost to produce the goods decreases which enables the firm to make more products at a lower cost for any given quantity. Therefore the supply of PVRSP’s product increases due to lower cost of production to manufacture.
S is the normal supply curve before the improvement in technology in the above mentioned diagram. After the improvement of technology, cost to produce the goods decreases which enables the firm to make more products at a lower cost for any given quantity Therefore, supply for PVRSP’s increase. Thus, the supply curve shifts from S to S1.
c. PVRSP Scenario 3. Suppose geo-thermal energy is viewed by consumers as a substitute source of power (as compared to PVRSP’s ). If the price (overall cost) of using geo-thermal as residential energy source decreases, then what change is predicted in the PVRSP market, using the model of supply and demand?...
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