Microeconomics Solutions

Questions: Explain, with the use of demand and supply diagrams, the effect of the following events on the market for solar panels: a. The price of solar panels has fallen to below the market equilibrium price. b. The price of electricity for an average household has increased by 50 percent. c. New technology has increased the productivity of solar panel producers. Answers: (a). As the price of solar panels fall below the market equilibrium price it results into a situation of excess demand and shortage of supply. The situation of excess demand arises because as price falls below the equilibrium price the overall demand for the solar panels increases with supply reaching at a lower level Q1 at the ongoing price. Now there are too many consumers trying to buy too few goods, hence in such a situation sellers respond by increasing prices of solar panels without losing onto their sales such that the demand for the solar panels fall and quantity supplied rises and the market again moves towards the equilibrium. As we see in Fig 1(a), when price fall below the equilibrium point, from P0 to P1, higher number of solar panels are demanded at the price P1 at QD with the supply decreasing at the ongoing price reaching QS, which is a situation of excess demand. As sellers raise prices of solar panels, the demand for solar panels falling and the market again moving towards to initial equilibrium point E0. Fig (a) (b). With increase in price of elasticity by 50% the solar panels demand increases because solar panel is a substitute for electricity. Hence, there occurs a shift in the demand curve of solar panels upward, which increases the price of solar panels. Hence in Fig 1(b) we see the demand increase is shown by a shift in the demand curve from D0 to D1 which leads to a rise in price from P0 to P1. The new equilibrium point is achieved at E1 which is at a higher output and higher price. Fig (b) (c). As new technology increases the productivity of solar panel producers they start producing more of solar panel goods which increases the supply of solar panels in the market. The increase in productivity of the producers shifts the supply curve of the solar panels rightward, increasing supply of solar panels at the given price levels. Hence with the shift in supply curve the price of solar panels decreases. Thus in Fig 1(c) we see the supply curve shifts from S0 to S1, price of the solar panels fall from P0 to P1, and the new market equilibrium point is achieved at E1. Fig (c) References: Pindyck, R, Rubinfeld, D Mehta, P 2009, Microeconomics, Pearson, South Asia Varian, H 2010, Intermediate microeconomics, Affiliated East-West Press, New Delhi Economics online, Game theory, viewed 21 May 2016. Samuelson, P Nordhaus, W 2010, Economics, Tata McGraw Hill, New Delhi Mankiw, G 2007, Economics: principles and applications, Cengage Learning, New Delhi help, viewed 20 May 2016. Sen, A 2007, Microeconomics, Oxford, New Delhi Lipsey, R Chrystal, A 2011, Economics, Oxford, New Delhi Investopedia, Price elasticity of Demand, viewed 20 May 2016. Sowell, T 2010, Basic economics, Basic books, USA Hall, R Lieberman, M 2010, Economics: Principles and applications, Cengage learning, USA com, 2016, Game theory applications to oligopoly, viewed 21 May 2016.