economics project - price elasticity of energy in maharashtra_anish

8/11/2019 Economics Project - Price Elasticity of Energy in Maharashtra_anish

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To predict the future trends for next ten years using statistical tools- Co-relation and regression.

Objectives:-

The objective of the study report is to find out how much the demand of the electricity consumption per

capita gets affected in Maharashtra when prices are increased from time to time. Also as the income

per capita increases how the consumption pattern of consumers changes over a period of time. The

study is useful to understand how the government(Mahagenco) and other private players like Tata and

Reliance decide to increase the price to meet the demand which increases every year.

1. Introduction: Highest supply on any single day in Maharashtra was registered on 17020

MW and Supply 16194 MW. Average supply by Mahavitaran is 15500 MW regularly.

Load shedding in 15% areas of the statethose have high commercial losses and poor bill

payment records. In these areas Distribution and commercial losses in urban areas is more

than 42%.


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Review of Literature :

The Elasticity of Demand for California Winegrapes Kate B. Fuller and Julian M. Alston

The article estimates elasticity of demand for California wine grapes. The approach of authors is

very scientific. They have addressed the following issues. They have used inverse demand model.First, demand for wine grapes is derived demand and not a consumer demand. The global supply

and demand for wine influence the demand for wine grapes. California wine is highly differentiated

product. The article states that the overall demand for wine is inelastic with price elasticity of -0.8.

The elasticity is inverse elasticity i.e. quantity change with respect to price change. The demand

elasticity for wine grapes is -0.4 in the short run and -4.5 in the long run. So, the losses in current

season due to weather damage will result in more than proportionate increase in price and value of

crop will increase. Similarly investment in production in the long run will result in less than

proportionate decrease in the price resulting in increased value of crop. It is an insightful article

with proper approach.

The Dynamics of Price Elasticity of Demand in the Presence of Reference Price Effects

The authors derive an expression for the price elasticity of demand in the presence of reference

price effects that includes a component resulting from the presence of gains and losses in

consumer evaluations. The effect of reference price is most noticeable immediately after a price

change, before consumers have had time to adjust their reference price. As a result, immediate-

term price elasticity is higher than long-term elasticity, which describes the response of demand

long after a price change, when reference price effects are negligible. Furthermore, because of the

differential effect of gains and losses, immediate-term price elasticity for price increases and price

decreases is not equal. The authors provide a quantitative definition for the terms immediate term

and long term, using the average interpurchase time and the discrete "memory" parameter Practical

consequences of the distinction between immediate- and long-term elasticities for the estimation

and use of elasticity values are discussed.

The Impact of Food Prices on Consumption: A Systematic Review of Research on the Price

Elasticity of Demand for Food

The article estimates price effects on substitutions from unhealthy to healthy food and price

responsiveness among at-risk populations. Experimental research in both laboratory and

intervention settings shows that lowering the price of healthier foods and raising the price of less

healthy alternatives shift purchases toward healthier food options. The article has presented a

summary of research findings of 160 papers related to price elasticity of demand of food products.

All mean elasticity estimates were in the range of -0.27 to -0.81 showing that demand for food

products is inelastic. Demand for soft drinks and meat were less inelastic while demand for eggs,

sugar, fats and oils was more inelastic. Demand for outside food was more elastic in comparison to

home food demand. The study helps form food policies to improve nutrition levels. It suggests


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that health tax levy on soft drinks and wafers can result in reduction of their purchase. It advises to

use different tax rates for different foods based on the findings.

The elasticity of demand for gasoline in China C.-Y. Cynthia Lin, Jieyin (Jean) Zeng

This paper estimates the price and income elasticities of demand for gasoline in China. The paper

further suggests some policy changes to discourage the consumption of gasoline. The price

elasticity of gasoline ranges from -0.497 to -0.196. It shows that demand for gasoline is relatively

inelastic. The income elasticity also is in the range of 1.01 to 1.05. The paper calculates elasticities

in various sectors. It is found that transportation sector has the highest price elasticity of demand

for gasoline. So a levy of tax on gasoline in this sector would reduce the consumption significantly.

The paper is elaborates the different facets of price elasticity of demand. It helps in policy

formation.

Demand Price elasticity of water in South Africa

1. Three basic issues needed to be handled :-

Water Scarcity- Increasing supply by building dams etc

Demand Management Restrictions and different tariff policy as per usage

Ensuring basic needs

The result of this study provides managers with important information about the threshold quantity

of water beyond which demand will not change with change in price. The article also seeks to study

price elasticity across different income groups.

Western Cape Town receives mean average rainfall of 34.8 cm. This fluctuates across season.

During dry seasons it aims to reduce consumption by 30%. It provides 6 KL of free water per

metered supply. Beyond that it charges more.

Factors affecting demand :-

1. Climate - Fluctuating dry/rainy season makes demand unpredictable.

2. Household demographics Age and number of members

3. Income Higher consumption in high income groups.

4. Pricing Increasing Block Tariffs affect the high income groups more.

Data Collection: Sampling across households through questionnaire. Only metered household

taken into consideration. Colored, black and white household taken in the proportion of 2:2:1 for

diversity and uniformity.

Y = X + Z (Y: Household consumption , X : Independent factors , Z : Household factors)


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After feedback from localities and analysis of data , it was found that , in the short run , the

demand is price inelastic. In the long run, low income group hardly change their consumption due

to price shifts. Higher income groups are relatively more price sensitive. Price elasticity is (0.990

for high income groups and 0.228 for low income groups)

Implications: The policy to manage and restrict water consumption can build on price mechanismonly on upper segment of the market. Since consumers of high income groups have high

consumption, increasing tariffs at higher consumption might work very well. IBT structure can set

in a way to improve living conditions of poor thus bringing equity in the society. For all consumers

without having metered supply, management by use of volumetric pricing is irrelevant. A proper

and fair management of resource needs other measures in these cases.

Estimating Price elasticity of demand for electricity in South Africa

Objective: To examine the South African economic sectors electricity consumption in response

to fluctuations in electric prices and economic output for the period from 1993 to 2006

Literature: South Africa has 39000 MW for its 50 million residents while Nigeria has 4000 MW

for its 150 million residents. Panel data analysis was carried for period 1993-2006. Electricity

consumption is determined as a function of its price and real per capita income. The one model

includes real electricity prices whereas the other model uses electricity prices with compasred to

gas prices. Output and real electricity prices are significant factors for determining electricity

consumption (Price elasticity : - 0.16, income elasticity : + 0.15)

Results :

2. The results of the panel data analysis show that the industrial sector was the only one with

statistically significant price elasticity over the study period

3.

The economic output was a positive contributing factor to the industrial and commercial

factors.

4. His is in contrast with the other 3 sectors agriculture , transport and mining, whose

electricity consumption was affected neither by price nor by production.

Reason of observation : The anomaly is due to relatively low and declining electricity prices over

the study period.

The proportion of electricity cost to the total cost is relatively small in majority of the sectors.

There was no major incentive to reduce electricity or to be efficient.

Other effects: 1. Insecure Policy making : Lack of behavioural responses to price changes

contributed to uncertain environment in policy making.

2. Lack of sensitivity to price changes has also acted as a a stimulus for the growth in CO2

emissions.


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Future: 1. In future a structural change is expected due to the high increases in the electricity tariffs.

2. The past insensitivity to price changes might disappear, with different sectors turning to more

efficient technologies and efficient and affordable forms of energy.

Price Income elasticity of Australian retail finance

Objective: Model price and income elasticity of retail finance in Australia using aggregate quarterly

data and auto regressive distribution lag approach.

Method: Study impact of global recession (2007 onwards) on retail finance demand in Australia.

This has affected four submarkets namely: Housing loans, term loans, credit card loans and

margin loans. A large number of variables have been identified as demand factors, particularly

reflecting the value of the asset for which retail finance demand is derived. These include housing

prices, inflation, consumer sentiments as measures of consumer confidence, motor vehicle and

retail trade sales.

Results: In the long run, it has been found that significant price elasticity only for term loans and

marginal loans

Global financial crisis only affected the long term demand for term loans and marginal loans

Overall, most of the submarkets in the analysis indicate that retail finance demand is certainly price

elastic but more income elastic.

Price elasticity for Residential Water Demand

Objective: To estimate the price elasticity of demand by residential households for water

Method: To analyze the annual changes in marginal prices of water and its effect on changes in

distribution of water and consumption at census block group levels. This analysis reduces effects of

external and demographic factors in determining responsiveness to price.

The analysis is based on records for residential meters served by the Municipal Phoenix water

system. The analysis isolated changes in the marginal price for water over time. These changes are

not associated with any household moving between price blocks.

Results: 1. Simplified rate structures residents of Phoenix faced where most residential customers

are in the highest block throughout the year due to relatively low consumption threshold defining

price blocks. As a result there would be no meaningful variation in the marginal price for these

customers.

2. The seasonal change in rates will be experienced by all water consumers at the same time


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3. Responses to the price change would be difficult from changes in water needs due to

temperature changes throughout the year.

4. Phoenix systems price structure is not unique. As a result, the opportunities for quantity

adjustments leading to movements among blocks for many water systems are limited.

Conclusion:Price responsiveness is reduced quite substantially for the summer months when the

overall situation is abnormally dry. In the winter months, we see responsiveness to price change

across all consumption percentiles.

Impact of consumer prices and cash income on consumption of dairy products

Objective : To study demand for dairy products based on the consumer price of milk product and

disposable cash incomes

Methods used : Impact on households of employees, household of self employed persons and

pensioners has been found by regression and correlation analysis and marketing research.

While examining, the consumption of dairy products was quantified elasticity of demand , own

price elasticity, indirect(cross) elasticity of demand, substitution relationships, complementary and

association.

Literature: when income grows , the marginal propensity of expenditures on fodd decreases until

it reaches a point where energy consumption is independent of income.Food costs are close to

relative saturation and due to the effect quality, decrease in in expenditure and relative and does

not reach an absolute and saturation.

Conclusion : The share in expenditures on milk and dairy products in total consumption

expnditures was the highest in households of pensioners ie. 25.61 %annually. The lowest share of

expenditures (19.33%) had the household of self employed persons.

In the household of self employed persons , consumer demand for drinking milk is in

complementary relationship with demand for cheese and dairy products.Cross price elasticity of

demand = 0.8897

Consumer prices of drinking milk were in the monitored households more less balanced, but the

prices of other dairy products were significantly lower in the householdsof pensionersand therefore

were probably lower quality.

Conclusion: The tightness of dependency between response of households to increasing prices of

dairy products and economic status of the head of the family at work and from resulting incomes is

only modest.


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Are demand elasticities affected by politically determined tax levels? Simultaneous estimates of

gasoline demand and price

Lennart Flood*, Nizamul Islam and Thomas Sterner, Department of Economics, School of

Economics and Commercial Law, Goteborg University, Goteborg, Sweden Raising,Applied

Economics Letters, 2010, 17, 325

328

Countries with higher taxes and prices have lower demand per capita. It is this type of data that

underlies the demand elasticities. Taxes themselves appear to be determined by consumption

levels in a form of political feasibility relationship: In countries where almost everyone is

dependent on the car and consumption levels are high it is politically almost impossible to raise the

gasoline tax level. In countries where fewer people use a car and consumption levels are lower it is

politically easier

The author analyzes the reverse causality from consumption to price through a politically decided

tax variable. He checks that whether the inclusion of this supply side or tax setting equation will

change the magnitude of the demand elasticities. The study implies policies need to be tougher:

taxes or prices need to be raised more in order to attain a given level of demand reduction. The

higher a tax and the lower the consumption levels, the smaller the resistance to future tax increases

may be. Thus it may be important to start a policy which eventually gathers momentum as more

and more consumers adapt and thus find the policy acceptable.

Income and price elasticity of electricity demand: Aggregate and sector-wise analyses

byFaisal Jamil, andEatzaz Ahmad

The study rigorously examines the determinants of electricity demand at aggregate and sectoral

levels in Pakistan. The findings give support to the existence of a stable long-run relationship

among the variables and indicate that electricity demand is elastic in the long run to both income

and price at aggregate level. At sectoral level, long-run income and price elasticity estimates follow

this pattern except in agricultural sector, where electricity demand is found elastic to output but

inelastic to electricity price. On the contrary, the coefficients for income and price are rather small

and mostly insignificant in the short run. The study conducts analysis for four electricity

consuming sectors . Sectoral analyses are for residential, commercial, manufacturing and

agricultural sectors. The study obtained higher positive income and negative price elasticity in the

long run. Electricity demand is a derived demand, resulting from the desire for output or activity

in question. Its consumption does not yield utility by itself, but is used as an input in other

processes that give utility. For example, in hot summer days, the demand for cooling the space andwater rises. Since the cooling appliances such as refrigerators and air-conditioners require

electricity to operate, its consumption rises during peak summer. The demand for electricity like

other goods essentially depends on income and price among various other factors.

The result of study showed the long-run income elasticity of electricity demands is significant and

greater than one in all cases, suggesting responsiveness of electricity demand to economic
http://www.sciencedirect.com/science/article/pii/S030142151100382Xhttp://www.sciencedirect.com/science/article/pii/S030142151100382Xhttp://www.sciencedirect.com/science/article/pii/S030142151100382Xhttp://www.sciencedirect.com/science/article/pii/S030142151100382X


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growth. the price elasticity of electricity demand is less than unity only in agricultural sector. All

other models exhibit elastic electricity demand with respect to its price.

Estimation of urban residential electricity demand in China using household survey databy

Shaojie Zhou andFeiTeng, ,

Energy Policy-Volume 61,October 2013, Pages 394

402

The research paper uses annual urban household survey data of Sichuan Province from 2007 to

2009 to estimate the income and price elasticities of residential electricity demand, along with the

effects of lifestyle-related variables. The empirical results showed that in the urban area of Sichuan

province, the residential electricity demand is price- and income-inelastic, with price and income

elasticities ranging from 0.35 to 0.50 and from 0.14 to 0.33, respectively.

In the past decades, China has been experiencing the rapid growth of electricity consumption,

along with the booming economy as well as the acceleration of the industrialization and

urbanization processes.

Significant disparities are observed in terms of the penetration rates of home appliances, such as

the refrigerator, air conditioner, and computer . The empirical results above reveal that

residential electricity demand is price and income inelastic. Specifically, given the increasing social

mobility between urban and rural areas, the lifestyle of rural residents tends to converge with that

of urban residents, and the penetration rates of certain home appliances have also increased

rapidly in rural areas. For example, the penetration rate of the refrigerator is nearly saturated in

urban areas. Thus rural areas show low elasticity of price rise.The household electricity

consumption becomes less sensitive to electricity price and household income when considering

holdings of home appliances, which also directly affects household electricity consumption. Even

the long lifetimes of home appliances and the possible lock-in effect in utilizing home appliancesfor households, a more diversified policy mix should be considered to provide incentives to

households that use energy-efficient appliances. Both subsidies and rebates for high-efficiency

electric home appliances could help accelerate the phase out of less-efficient home appliances and

save energy, especially for refrigerators and computers. The article thus shows how the

dependability of human over electrical appliances has made the price elasticity inelastic in China.

Trends in income and price elasticity of transport demand (1850

2010)

by Roger Fouquet, Basque Centre for Climate Change(BC3),AlamedaUrquijo4-

4,48008Bilbao,Spain b IKERBASQUE, BasqueFoundationforScience,AlamedaUrquijo36-

5,48011Bilbao,Spain

The purpose of this paper is to estimate trends in income and price elasticities and to offer insights

for the future growth in transport use, with particular emphasis on the impact of energy and

technological transitions. In2010, long run income and price elasticity of aggregate land and

transport demand were estimated to be 0.8 and -0.6 in United Kingdom However in mid

nineteenth century they were very large 3.1and -1.5, respectively. These trends suggest that future

elasticities related to transport demand in developed economies may decline very gradually and, in
http://www.sciencedirect.com/science/article/pii/S0301421513005995http://www.sciencedirect.com/science/article/pii/S0301421513005995http://www.sciencedirect.com/science/journal/03014215http://www.sciencedirect.com/science/journal/03014215/61/supp/Chttp://www.sciencedirect.com/science/journal/03014215/61/supp/Chttp://www.sciencedirect.com/science/journal/03014215http://www.sciencedirect.com/science/article/pii/S0301421513005995http://www.sciencedirect.com/science/article/pii/S0301421513005995


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Financial Year Per capita Income (Rs.)

2005-06 35915

2006-07 41624

2007-08 49568

2008-09 57218

2009-10 74027

2010-11 83395

2011-12 95339

2012-13 107670

0

20000

40000

60000

80000

100000

120000

Per capita Income (Rs.)

Per capita Income (Rs.)


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It has been observed from the below graph that post revival of economy, the per capita

income has been increasing at a greater rate

This year wise income will help us analyze the trends of demand Vs per capita income

2. Year Wise demand supply data for Maharashtra

Year Demand (MW) Supply (MW)

2005-06 92715 81541

2006-07 102765 84117

2007-08 110005 89138

2008-09 114885 93846

2009-10 121901 95761

2010-11 124936 1015122011-12 128296 107018

2012-13 141382 117722

The deficit was maximum in 2007,08 09 during economic recession . The same has been

observed that the trend has been decreasing and currently the deficit is at 17%.

0

20000

40000

60000

80000

100000

120000

140000

160000

Demand (MW)

Supply (MW)


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3. Domestic tariff over 3 year gap Cost of per unit production for 2 consecutive years

A. Change in tariff from 2009-10 to 2012-13 :-

B. Increase in production cost per unit of electricity produced :-

0

5

10

15

20

25

Deficit %

Deficit %

0

5

10

15

20

25

30

35

40

45

2009-10 2012-13

Tariff below 100 units

Tariff below 100 units


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Analysis : 2011-12 and 2012-13

1. Short Run Price Elasticity = Change in demand%/ Change in price%

= ((141382-128296)/128296) /((3-2.7)/2.7)

= 0.1012/(-0.05)= -0.7

2. Income elasticity of demand = Change in demand %/ Change in income %

= 1.059259259/0.881750498

= 1.2

0 10 20 30 40

2009-10

2012-13

Cost of Per unit Production (Rs/unit)

Cost of Per unit

Production (Rs/unit)

economics project - price elasticity of energy in maharashtra_anish

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