Microeconomic Analysis Final Report

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Demand Price Elasticity

When it comes to using solar energy, we have to consider if the desired useful energy form or technology has many available close substitutes. In this case, there are close methods of harvesting solar energy similar to solar panels. Research shows that using solar energy is becoming a necessity (inelasticity) to reduce and eliminate energy shortage, climate change, and global warming. In addition, using PV solar panels could help consumers save in income which means that a lower amount of income (inelasticity) would be used by reducing electricity bill per month (Brownson, 2014).

In my research since the national average cost for solar panels per watt is somewhere between $3 dollars and $6 dollars per watt, looking at percentage changes in quantity and price, we want to consider the price change and change in production of Mega Watts (MW).

Demand Elasticity Formula:

1) We want to determine if the price is elastic in the $3 to $6 price range?

The following table shows part of the demand for solar panels:

Price (P) Quantity (Q) of (MW)

$15 4000

$8 3000

$6 2000

$3 1000

Determine percentage change in quantity demand:

(1000 – 2000)/[(1000+2000)/2] = -1000/1500= -.66

Determine change in price:

($6 - $3)/[(6+3)/2] = $3/$4.50= .66

ED = -.66/ .66= -1

A: I conclude that the price is unit elastic in this range since ED = 1.

2) Ed = 0.26 in the $8 - $15 price range. In this range of demand, by what percentage would quantity demanded change if price changes by 2 percent?

(0.26) x (2) = 5.2

A: Quantity would be expected to change by 5.2 percent.

3) If the price falls from $6 to $3, total revenue rises by $9,000 from $3,000 to $12,000

TR @ $6 = ($6) x (2000 units) = $12,000, and TR @$3 = ($3) x (1000 units) = $3000.

Supply Determinants

Due to technology creating cost efficient ways of producing photovoltaic PV solar panels, and government assistance, the prices for PV solar panels has decreased and the supply for solar panels has increased. This would not affect the demand for solar panels since a change in resource prices is a supply factor, not a demand factor. Since there is an increase in demand and supply and the focus is about equilibrium quantity (Q) and not equilibrium price (P), the increase in demand will force both equilibrium price and quantity up due to initial shortages. The increase in supply will then force price down, but quantity will again increase. The net effect on quantity is an increase in (Q).

SUPPLY CHART

Price [pic 11][pic 12]

High Supply (low price high quantity supply)

P1[pic 13][pic 14]

P2[pic 15][pic 16]

P3[pic 17][pic 18]

Low

Q1 Q2 Q3 Quantity [pic 19]

The Supply Determinants that’s been examined for this report are production costs, product technology, number of sellers, expectations for future pricing, and taxes and subsidies (Chan, 2014).

Production Costs

A few factors contribute to the price of solar power. Among those factors include the type of material, its accessibility, complexity in manufacturing and amount available and needed (The Solar Company, 2012). The average price per watt for a solar photovoltaic module has declined from an inflation-adjusted US$50 a watt in 1980 to less than US$2 per watt in 2010 (Inter PV, 2015). In 2008 companies located in the U.S. can produce a multi-crystalline silicon module for $0.68 cents per watt (Munsell, 2014). Today, the average costs for vertically integrated tier 1 makers are now forecast to fall yet another 6 percent in 2014 to a record low of $0.20 per watt (W), according to the NPD Solarbuzz Polysilicon and Wafer Supply Chain Quarterly report. Since 2008, solar PV wafer manufacturing costs (the combined costs of polysilicon and wafer processing) have declined more than 16 percent per year (Solarbuzz, 2013).

In the second quarter of 2009, LDK Solar a PV manufacturer reported to having 600,000 in inventory and $1,700,000 in sales revenue (Green Econometrics, 2009). It is not known how much of the revenues are fixed or variable, however I could assume that this is a variable cost. In addition, inventory levels for the 11 largest publicly traded PV suppliers increased 236% from 2006 to 2008. The rapid rise in inventories was driven by demand as revenues for these 11 PV suppliers increased 492% over this same period (Inter PV, 2015).

Wafer costs are only a third of what they were five years ago, and even though the rapid pace of cost reduction is starting to decline, the severe oversupply and extremely low selling prices are forcing polysilicon and wafer makers to continue to find ways to lower costs to previously assumed impossible levels (Solarbuzz, 2013). With the decrease in production costs, supply for solar panels has increased. Again, this would not affect the demand for solar panels since a change in resource prices is a supply factor, not a demand factor. The increase in demand will force both equilibrium price and quantity up due to initial shortages. The increase in supply will then force price down, but quantity will again increase. The net effect on quantity is an increase in (Q).

Product Technology

Crystalline silicon is the most common semiconductor material used to make photovoltaic cells otherwise known as PV or solar cells. These cells are built into modules that are brought together to create what we call solar panels. The larger the array, the more electricity is produced. Since mono-crystalline technology offers customers a better product along with greater bang for their buck,

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