Explain Demand And Supply Diagrams
Explain, with the use of demand and supply diagrams, the effect of the following events on the market for solar panels
Question 1: Explain, with the use of demand and supply diagrams, the effect of the following events on the market for solar panels: (a) The price of solar panels has fallen to below the market equilibrium price. (b) The price of electricity for an average household has increased by 50 percent. (c) New technology has increased the productivity of solar panel producers. Note: In each of your answers, explain the market equilibrium adjustment process.
Paper For Above instruction
The market for solar panels is heavily influenced by various factors that can cause shifts in supply and demand, subsequently affecting prices and quantities traded in the market. Using demand and supply diagrams helps elucidate these impacts and the underlying market adjustment processes in each scenario.
Scenario (a): The Price of Solar Panels Falls Below the Market Equilibrium
When the price of solar panels drops below the equilibrium price, a surplus occurs because the quantity supplied exceeds the quantity demanded at that price point. Diagrammatically, the supply curve remains unchanged, but the market price declines to a level where the quantity demanded increases, and the quantity supplied decreases, moving the market toward a new equilibrium.
Initially, excess supply exerts downward pressure on prices, prompting producers to reduce their output or exit the market if losses occur. As prices decrease, consumers are encouraged to buy more solar panels, increasing demand. Over time, the supply curve may shift leftward if producers reduce production or leave the market, leading to a new equilibrium at a lower price and quantity aligned closer to equilibrium.
Scenario (b): The Price of Electricity Increases by 50%
A substantial increase in the price of electricity makes solar panels more attractive as an alternative energy source, shifting the demand curve to the right. Diagrammatically, this means increased demand at every price level, leading to a higher equilibrium price and quantity.
As demand increases, the market price rises, incentivizing producers to supply more solar panels. This process continues until the market reaches a new equilibrium where the higher demand intersects with the supply curve. The market adjustment involves a movement along the supply curve to the new equilibrium point, reflecting higher prices and increased sales volumes.
Scenario (c): Advances in Technology Increase Productivity of Solar Panel Producers
Improvements in technology reduce production costs and increase the supply of solar panels, shifting the supply curve to the right. This results in a lower equilibrium price and a higher quantity traded in the market, assuming demand remains unchanged.
The increased supply exerts downward pressure on market prices, prompting a decline in the equilibrium price. Consumers respond to lower prices by purchasing more solar panels, increasing the quantity demanded. The market naturally moves toward a new equilibrium with more solar panels sold at a lowered price, reflecting technological progress.
References
- Krugman, P., & Wells, R. (2018). Economics (5th ed.). Worth Publishers.