Readers Question: what will happen to the equilibrium price and quantity if there is an increase in the price of oil that is used in electricity generation?
If there is an increase in the price of oil, it means that the cost of electricity will increase. Therefore, the supply curve will shift to the left. This will cause an increase in price from p2 to p1
The quantity will fall from Q2 to Q1
Note: However, demand for electricity is likely to be inelastic. This means as the supply curve shifts to the left there will be a significant increase in price, but, a much smaller % fall in demand
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It’s also worth pointing out that in the US, we generate a very small portion of our electricity with oil. According to the DOE/EIA’s Annual Energy Review, Table 8.2a, in 2006 oil accounted for only about 1.6% of US electricity.
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