MUF0061: Article on Australian Economy - Economics Assessment Answers

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Task: Write an Article on Australian Economy

• Equilibrium & Price Mechanism
• Price Ceiling
• Price Floor
• Elasticity of Demand
• Elasticity of Supply
• Production costs

From the article, it can be found that solar energy prices have come down due to the increase in the supply of solar power energy (Macdonald-Smith, 2016). After the revision of the regulations with regard to renewable energy target, the interests of various companies to review their supply of renewable energy sources have been renewed. As there has been an increase in the supply of renewable energy due to various technological improvements, this has resulted in the shift in the supply curve of renewable energy (particularly solar energy) which has eventually brought down the prices of the solar energy. We know that the equilibrium price is determined by the demand and supply forces for any commodity. This is true even in the case of solar energy as a substitute. Previously due to high prices in the solar energy market, demand for solar energy was more inelastic as the prices were high.

[caption id="attachment_2213" align="aligncenter" width="468"] Figure: renewable energy market.[/caption]

The equilibrium price P1 was a result of relatively inelastic demand for solar power and the adequate availability of other energy sources as substitutes. (Baumol and Blinder, 2012) However as the complaints about the climatic change are on the increase, government of Australia has revived the 2020 renewable energy targets legislation that has triggered the interest of the suppliers of renewable energy in the country. Consequent to the technological improvements in the supply of renewable energy, the costs of producing solar power us dramatically come down, (Mankiw, 2011) this resulted in the shift of the supply curve and as the prices of other energy sources have gone up, the demand for solar power by the various households in Australia has gone up that has resulted in shift in both demand and supply of solar power in Australia as shown in the following figure.

Initially the demand for solar power was DD 1 and the supply of solar power was SS1. The interaction of the demand and supply forces in the solar power market resulted in a high equilibrium price P1 and lower equilibrium quantity Q1 in the market. However as there are problems created by the traditional energy sources, people are more willing to try out renewable energy sources like solar power with the resulted in a shift of the demand curve from DD 1 to DD 2 as shown in the above figure. Simultaneously technological improvements in the solar energy production as reduced costs of production in the solar power industry (firms like origin energy, enjoy lower costs of production) and this has resulted in a shift in the supply curve from SS 1 to SS2 and since both the demand and supply curve’s have shown an increase, the equilibrium price is at the same level (though it may be different, if they are elasticities and degree of shift are different) at P1, and the equilibrium quantity that is sold in the market as increase to Q3 level which is a dramatic increase in the use of solar power and the Australian market. From the above analysis it can be seen that, the demand and supply forces in any market determines the equilibrium price and quantity and the shifts in the demand and supply curve are determined by various factors. The various factors that influence the shift in the demand curve are tastes and preferences of the consumer, income of the consumer, etc and the various factors that influence the shift in the supply curve are the government legislations like the subsidies provided and/or improvements in technology that help reduce cost of production (Pindyck, S and Rubinfeld, 2005).