IEEE Power & Energy Magazine - May/June 2014 - 12

for emergency use,
as one may realize
by climbing about
ten flights in a hurry.
now, elevators are
useless without electricity. consequently,
electricity is almost
the necessity of life
for upper floor dwellers of high-rise apartment houses.
Refrigerators are
similar. no one switches from electric to gas
refrigerators
when
the price of electricity
goes up by several percent. In addition, it is a
time-consuming and
expensive proposition
to equip each household with a backup
generator for running electric appliances

and equipment whenever power line electricity is high priced.
consequently, when
the price goes up by
a certain percentage,
the quantity demanded
of electricity will not
go down as much. In
other words, the ratio,
Ed, of the percentage
decrease in demand
to the percentage increase in price is less
than one. For example,
a 10% price increase
may induce only a 5%
decrease in quantity demanded. In this case, Ed
is 5% divided by 10%,
which is 0.5. economists call Ed with a minus sign the price
elasticity of demand.

Simple
economic
reasoning
indicates that
the price and
profits will tend
to increase
and the quality
of electricity
will tend to
decline after
deregulation.

If the price goes up 10% and the
quantity goes down 5%, then the total
revenue of suppliers goes up about 5%,
since revenue is given by price times
quantity. the increase in revenue and
the cost reduction due to the decreased
quantity are both additions to profits.
similarly, if Ed is less than one, profits increase with increasing price. so
the suppliers will try to raise the price
at every opportunity. When Ed is one,
there is no increase in revenue but the
cost reduction due to the decreased
quantity is still an addition to profits.
When Ed increases further and the
revenue decreases more than the cost
reduces due to the decreased quantity,
profits start to decrease. only then will
the suppliers get enough incentives to
reduce the price.
now suppose that Ed is less than one,
and the number of suppliers is more
than one. If one supplier tries to increase

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Table of Contents for the Digital Edition of IEEE Power & Energy Magazine - May/June 2014

IEEE Power & Energy Magazine - May/June 2014 - Cover1
IEEE Power & Energy Magazine - May/June 2014 - Cover2
IEEE Power & Energy Magazine - May/June 2014 - 1
IEEE Power & Energy Magazine - May/June 2014 - 2
IEEE Power & Energy Magazine - May/June 2014 - 3
IEEE Power & Energy Magazine - May/June 2014 - 4
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IEEE Power & Energy Magazine - May/June 2014 - 9
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IEEE Power & Energy Magazine - May/June 2014 - 12
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IEEE Power & Energy Magazine - May/June 2014 - 84
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IEEE Power & Energy Magazine - May/June 2014 - 86
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IEEE Power & Energy Magazine - May/June 2014 - 88
IEEE Power & Energy Magazine - May/June 2014 - 89
IEEE Power & Energy Magazine - May/June 2014 - 90
IEEE Power & Energy Magazine - May/June 2014 - 91
IEEE Power & Energy Magazine - May/June 2014 - 92
IEEE Power & Energy Magazine - May/June 2014 - 93
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IEEE Power & Energy Magazine - May/June 2014 - 118
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IEEE Power & Energy Magazine - May/June 2014 - 126
IEEE Power & Energy Magazine - May/June 2014 - 127
IEEE Power & Energy Magazine - May/June 2014 - 128
IEEE Power & Energy Magazine - May/June 2014 - Cover3
IEEE Power & Energy Magazine - May/June 2014 - Cover4
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