Will people reduce the usage of electricity if the price of electricity increases?

Energy firm SSE, which trades as Scottish Hydro, Swalec and Southern Electric, will increase its domestic electricity prices by an average of 9% from 15 October in United Kingdom.

Based on the law of demand, the higher the price of a good, the smaller is the quantity demanded and people might not use it anymore if the price is too high. However, electricity is different because it is a product that people will use it daily and the quantity demanded will still be affected but not in a huge amount. The law of demand results from substitution effect. If the price of electricity increases, I believe that people will buy solar panels to be installed at their home and they will decrease the usage of electricity because solar panels generate electricity. Besides that, income effect is also a result of the law of demand. Despite the increasing price of electricity, I believe that people from low end or medium end family will buy fan instead of buying air conditioner because air conditioner consumes more electricity compared to fan but high end family will not bother about the increasing price of electricity. There are six main factors that change demand which are the prices of related goods, expected future prices, income, expected future income and credit, population and preferences. . If the price of electricity remains the same and the quantity demanded for electricity is increasing, the quantity demanded for electricity will exceed quantity supplied which leads to shortage of electricity. Electricity is considered as normal goods because if the income increases, the demand of electricity will increase too. Moreover, if the population increase, the usage of electricity will be higher and therefore the quantity demanded for electricity will increase. However, if the price of electricity increases, the demand of electricity will decrease and the producer of electricity will not run out of supply because the usage of electricity decreases. Equilibrium in a market occurs when the price balances the plans of buyers and sellers. From my point of view, if the price of electricity increases, there will be no shortage of electricity and hence equilibrium can be achieved since quantity demanded and quantity supplied are equal.

            The price elasticity of demand is a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same. The price elasticity of demand on electricity is inelastic because if the price of electricity changes it will not affect the quantity demanded of electricity. Electricity is a daily use product therefore people will still use electricity although the price increases. Without electricity, people can’t do many things such as use computer, operate machines, watch television and many more. Therefore, I predict that people from low end and middle end family will protest on this issue and hope that the government will consider on cancelling the plan on increasing the price of electricity. As electricity is a normal good, when people have increase in their income, the demand of electricity will increase as well and therefore, it will manage to avoid the surpassing of quantity supplied and approach equilibrium position. However, electricity is categorized as necessities because there are no other valid sources that can replace electricity and hence, it is an inelastic demand. Income elasticity of demand measures the responsiveness of demand to a change in income, other things remaining the same. Electricity is considered as normal good therefore, the income elasticity of demand is positive.

            A price ceiling or price cap is a regulation that makes it illegal to charge a price higher than a specified level. Price ceiling will lead to market failure such as underproduction or shortage of electricity and black market will occur. The obstacles to efficiency that bring market failure and create deadweight losses are price and quantity regulations, taxes and subsidies, externalities, public goods and common resources, monopoly and lastly high transactions costs. I believe that if the government impose price ceiling on electricity, the quantity of electricity supplied will decrease to less than the efficient quantity. As the quantity electricity supplied decreases, a deadweight loss will occur and arises. Besides that, producer surplus and consumer surplus will shrink. There will be a potential loss from increased search activity. From my opinion, price ceiling will only bring negative effects to both producer and consumer due to both of their surplus shrinks. Moreover, consumer will face shortage of electricity if price ceiling of electricity occurs and therefore creates a black market in electricity.  A black market is an illegal market that operates alongside a legal market in which a price ceiling or other restriction has been imposed. Black market will sell the electricity at a much higher price when shortage of electricity occurs. Hence, discrimination will occur if the price ceiling of electricity is imposed. Other than that, there is no tax imposed on electricity and therefore with no tax, marginal social benefit equals marginal social cost and the market is efficient. Total surplus which is the sum of consumer surplus and producer surplus is maximized. Lastly, with the increasing of price in electricity, I predict that there will be some people protest on this issue and hope that the government will establish subsidy to the producer of electricity so that the price of electricity will decrease instead of increase. A subsidy is a payment made by the government to the producer. Subsidy will lead to some effects for example an increase in supply, a fall in price and increase in quantity produced, an increase in marginal cost, payments by government to producers and insufficient overproduction.