Markets, Prices, and Efficiency

1
Markets, Prices, and Efficiency

• Dr. David Loomis
• Department of Economics
• Illinois State University

2
Economic Efficiency

• Perfectly functioning economy can be thought of
  as a giant machine that maximizes welfare, which
  is the difference between the pleasure consumers
  derive from output and the disutility of
  contributing inputs.
• Economic efficiency is a discussion of how close
  the actual economy comes to attaining that
  maximum welfare

3
Demand Curve

• Demand curve tells us the marginal utility of a
  good in terms of the price the consumer is
  willing to pay

4
Supply Curve

• Supply curve is the marginal costs in terms of
  societys resources to provide an additional unit
  of the good

5
Equilibrium

• Marginal social costs equals price which equals
  marginal utility
• The resources used to produce the last unit of
  product provides exactly as much benefit to
  consumers as they cost. There is no way the
  resources of society can be reallocated to
  generate more utility.
• Price is both a measure of marginal benefit to
  each individual and of marginal cost to society

6
Application to Energy Markets

• Price is not equal to marginal cost
• Oligopolistic suppliers
• Regulated utilities equal to average cost
• Cost of pollution not included in market price
• Fuels are not substitutes in certain cases
• Home heating
• Industrial plants

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Net Energy Analysis

• Energy remaining for consumer use after the
  energy costs of finding producing upgrading and
  delivering have been paid
• This measure is a proposed alternative for
  investment decisions to a cost benefit analysis
  and economic efficiency
• May be useful for some analyses but generally
  problematic

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Energy Efficiency

• using less energy to provide the same level of
  energy service.
• insulating a home to use less heating and cooling
  energy to achieve the same temperature.
• installing fluorescent lights and/or skylights
  instead of incandescent lights to attain the same
  level of illumination.
• Efficient energy use is achieved primarily by
  means of a more efficient technology or process
  rather than by changes in individual behaviour.

9
Energy Conservation

• Reducing the amount of energy used by behavioral
  changes and energy efficiency
• Energy conservation and renewable energy are the
  twin pillars of sustainable energy