Answer to Question #115925 in Macroeconomics for Muhammad Sami

Question

Q – 1: A market for electricity is in equilibrium in Bangladesh at a point where both supply and demand curves intersect each other. If the following events (price factors or non price factors of demand or supply) take place into the market of electricity then how it will affect equilibrium point, equilibrium price and equilibrium quantity of electricity in Bangladesh. Use graphical representation for each case separately to answer your question. Label and interpret each diagram.
Incomplete case does not carry marks. (1 x 8)

(i) If proportion of general sales tax (GST) on electricity is increased by the Govt. of Bangladesh.
(ii) When the overall prices of the factors of electricity increase.
(iii) Govt. of Bangladesh opens up doors for Research and development for all the firms to produce cheap electricity in Bangladesh.
(iv) During the new fiscal year; Govt. of Bangladesh has decided to decrease the proportion of direct personal tax.

Answer 1

In Bangladesh, general sales tax is charged to consumers based on the purchase price of certain goods and services. If the general sales tax is increased by the government in Bangladesh, this will lead to an increase in demand of electricity supplied this results to equilibrium quantity and equilibrium price go up. Since more people are willing to buy electricity which will lead to an increase in demand. More electricity will be bought which leads to the price of electricity going up.

A decrease in demand results to both equilibrium quantity and equilibrium quantity go down. With less people interested in buying electricity the equilibrium quantity drops. 

 An increase in supply will make equilibrium price to fall, and equilibrium quantity to rise. Since more electricity is being supplied to the market so we would expect quantity to rise, and the prices to fall .The demand for electricity will shift to the right from D1 to D2 .The new equilibrium will be E1.

It is illustrated by the following graph.

When the overall prices of the factors of electricity increase.

For electricity to be produced there are some factors behind it .Some of these factors that are necessary for the production of electricity include;                                                                                                                                               

  Power plant cost of installation and maintenance goes up then the price of electricity will also go up .The  maintenance cost of those machines is very important for them to last longer.                                                                           

The weather conditions is the major factor for production of electricity. For instance if there is a very poor condition of weather like too much rain or wind may destroy the electric poles ,cables or even machines. This may make the cost of electricity to increase unlike when the weather is good.                                                 

 The cost of transmission of electricity from the source to homesteads may also influence the price of electricity. If the cost is low then the price of electricity will be low.                                                                                                   

  Regulations by the government and the electricity production companies. When these regulations does not increase the profit of the company then the price of electricity will go up but when the regulations are in favour of the company the prices will go down.                                                                                                                       

In our case since the overall prices have been increased then the general prices will increase and the quantity demanded decreases since not all people will afford those prices.                                                                                       

  It can be illustrated by the following graph.

Govt. of Bangladesh opens up doors for Research and development for all the firms to produce cheap electricity in Bangladesh.

When the government opens doors for research and development this will encourage innovations and more sources of electricity will be found. The sources of electricity will increase .This will increase the supply of electricity and the demand will rise since the  price of electricity will be low due to the many sources as compared earlier where there were fewer sources. This can be illustrated by the following graph.