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Consumer Response to Electricity Price Changes
Suppose the price of residential electricity permanently increases by 30%. Analyze how the price elasticity of demand for electricity is likely to differ between the first month after the price change and five years after the price change. In your answer, explain the key factors that cause this difference and provide specific examples of consumer adjustments for each time period.
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Social Science
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Economy
CORE Econ
Economics
Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
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Consumer Response to Electricity Price Changes
Consumer Response to Utility Price Changes
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A company that sells a patented, highly specialized medication for a chronic condition is considering a permanent 30% price increase. The medication has no direct competitors. Two executives are debating the strategy:
- Executive A argues: "Let's proceed. In the first six months, our revenue will soar. Patients depend on this medication daily and have no other immediate choice, so the quantity demanded will barely drop."
- Executive B argues: "I'm cautious. This price hike could accelerate research and development by other firms to create a substitute. Within a few years, we might face new competition that erodes our market share, or doctors may start prescribing older, less effective treatments more often."
Based on the economic principles of demand over different time horizons, which executive's reasoning best incorporates the potential long-term risks?