9/09/2009

Electicity Demand Decrease

I recently watched a story on MSNBC about declines in the demand of electricity in several areas throughout the country. To follow-up, I found a more thorough article on msnbc.com that I feel explains the issue.

The article explains that, "Consumers and businesses may finally be seeing some relief from rising utility bills, thanks to the biggest decline in U.S. electricity demand in decades." This decline in demand is expected to last throughout the rest of 2009.

This really goes to show how severe the economic downturn has been for some families. In the past decade, increased electronic innovation and demand for these electronics (i.e., iPods, computers, video game consoles, etc.) has increased as well. It appears that to save money, people are cutting back on the use of their electronics. This trend began last year when power consumption decreased 1.9%.

This trend is interesting because according to many different studies, the own-price elasticity of demand for electricity is inelastic. This means that an electricity price increase of 1% results in less than a 1% change in demand for electricity. While the numbers aren't enough to convince that electricity is now an elastic good, it does pose the question: if pushed far enough, COULD electricity (and various other utilities) become elastic goods?

I know that I, personally, am taking care to save money in any way possible right now. I constantly find myself turning down the air-conditioning, or unplugging appliances that are not being used. I can only imaging what people who are under tighter money restrictions than I am are doing to save money.


http://www.msnbc.msn.com/id/32709382/ns/business-oil_and_energy/

7 comments:

Thomas said...

I totally believe that, if prices are pushed high enough, electricity will definitely become an elastic good. During hard times especially, people cut back on whatever they can.

If the price of electricity were to go up 20% this year, I am positive that people would use electricity much less than they are now, but it definitely wouldn't be a pretty thing to behold.

All of us are addicted to being able to have an air conditioned house, electronic appliances, tvs, and computers that we can use whenever we want and use as long as we want. Just like how when the price of gasoline goes up dramatically people often cut back on driving, people will definitely cut back on electricity usage if prices go up dramatically.

Rebecca said...

The local newspaper recently carried a similar article about decreasing utility bills.

The question of own-price elasticity is challenging. To me the relevant elements are adjustment time and hidden costs.

Whatever the cause(s) for the demand for energy going down (less production, the effects of green thinking and education, milder climate, etc) too little time has passed to evaluate the own-price elasticity of electricity. That is because the natural response to change in demand may be affected by other costs that disproportionally affect price.

Supposing demand continues to drop over the long term, the percentage change in the quantity demanded may not necessarily cause a corresponding change in price.

The inelasticity of electricity would be confirmed if prices stay constant in relation to a drop in demand.

What may be happening in the short run is other factors (costs) are adding to fixed costs which would affect changes in pricing while demand is changing.

That may be what we are seeing based on article. Costs of rehabilitating and retooling energy producing infrastructure, compliance with environmental standards, etc., changes the basic from "own-price" classic elasticity of demand due to change in complimentary goods.

I hope this adds to the discussion.

Robert said...

I find it facinating that there is actually a tipping point when the pompus American consumers actually change their living habits. For so long we would treat certain services and products as absolute needs and gave no room for adjustments.

The tipping point for gasoline prices was about $4.50. Many experts were surprised to see such a huge drop in demand for oil that sent the price of crude through the floor. I guess we finally hit the same point for electricity. However, the recession obviously was a catalyst for the tipping point.

I am glad to see that we are responsible enought to change our habits. I would be interested to see in which areas people were cutting back the most.

I'm sure that the energy producers will soon ramp down production to affect the prices.

Rachel said...

I read an article and I agree for today economy condation. Today people have less income than before and some don`t have income. Accordind to supply and demand when the price go high demad sift toward left. when price increase 20% People try to cut electricte expence what ever they can do. i agree for higher price elecrticy is elastic. People use other alternative like use more power saver appliances, solar system. Thus people try to use diffrent way to reduce ele expences. So ele demand decrease upon higer price.

But I think in good economy condation 20% higher price not much effect on demand. what you all think for this?

Dr. Tufte said...

Amelia: I'd like to see that link cleaned up.

Robert: there's a typo in your comment that I'll take off for next time around.

Also, I think you're confusing price and income elasticity. The drop off in demand we've see over the last year just shows that electricity is a normal good.

Thomas: the whole point of measuring elasticity is that goods don't just switch from being elastic to inelastic. Just because demand drops when price rises doesn't make something elastic: it's all about the relative size of the changes.

Robert: I don't think the tipping point argument is well posed here. There isn't any evidence that market responses to high gas prices "tipped" in any way. Casually, it looks like tipping, but that effect really isn't there at all.

Christopher said...

I have an idea for the suffering utilities companies – advertise.

Ok, so I am totally kidding about advertising being as option, but I think it is important to mention the reason we don’t see more advertising by the utilities companies in order to offset the reported reduction in demand. The reason is advertising elasticity.

According to such principle, if the demand for a product or service (utilities) changes significantly as a company(ies) boosts advertising for such, the product or service is said to be advertising elastic. Accordingly, it is hard to believe that the demand for electricity would suddenly increase if the utilities companies decided to try to gain back this 1.9% percent decline in revenues by advertising. A quick example might help illustrate my point. Let’s say you saw an advertisement for electricity on the television. Would you suddenly think, “You know what, that ad was right, I think I’ll go turn on a lamp.”? Probably not. The reason is that most consumers are fully aware electricity and its many applications and use it accordingly, thus, how is reminding consumers of electricity going to suddenly influence their desire to use more if it (demand)? It just won’t happen. Hence, like electricity, utilities probably have a very low advertising elasticity; and, therefore, advertising won’t help the utilities companies gain back any of that 1.9% reduction in revenue.

However, contributing to the advertising of complementary products with high advertising elasticities might help drive demand for utilities, but an accurate study would need to be conducted to identify such complimentary products and services.

Lucas said...

Competition is the key to keeping prices down for everything. Electricity is no different. Elasticity with electricity is a good topic for this area since most of the surrounding areas have just had some major price increases for electricity. I know that our rates were raised by 35% last year. This cause us to look at how we were consuming electricity and what we could do so as to consume less.

When the price goes up like that, then the demand tends to go down. Would that be such a bad thing with the energy crunch that we are having? There are other ways of fixing the crunch and I feel that raising the price is only one way to assist in alleviating the problem.

There need to be some rewards for those who conserve energy. There should also be more incentives for people to "create" their own energy by using solar panels. What about geo-thermal? There are many options one could consider to help with this problem and we need to look at all of them. I think in the future electricity will become an elastic good. Then again, maybe not. Look at gas in 2008.