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Energy: The 1970s are Back
Subject Comparative statics
Topic Equilibrium
Key Words Conservation, cost, wholesale price, retail prices, consumers, buying patterns, demand
News Story

Energy conservation is back. In the Northeast, home heating oil costs have passed the $1.50 per gallon mark. In the Midwest, where natural gas tends to be used more, the cost of heating a home between October and March is expected to increase 44 percent. In California, the wholesale price of electricity has risen 900 percent, causing utilities to plead to be allowed to raise retail prices.

As a result, consumers are changing their buying patterns. Energy-saving thermostats are selling strongly. They are improving technologically and becoming cheaper to produce. Some, especially in the Northeast, are switching to wood-burning stoves or coal-burning stoves. Firewood is consequently more in demand than usual. Weather-stripping is becoming more popular. Consumers are installing new windows and foam insulation, and are plugging cracks. In California, more people and businesses are considering solar energy panels and wind power. Across the country, when shopping for household appliances, consumers are choosing energy-efficient models.

(Updated February 1, 2001)

Questions
1. Draw a supply and demand diagram of the market for thermostats. Mark the initial equilibrium price and quantity.
a) Show the effect of the decrease in production costs. Why did you move the curve you did? What are the implications for the equilibrium price and quantity?
b) Now show the effect of the perceived improvement in technology on the equilibrium. Which determinant of demand or supply has changed?
c) Finally, show the result of the increasing price of energy. What kind of goods are energy and thermostats? Why?
2. Some consumers are turning to wood-burning stoves.
a) Draw a supply and demand diagram of the market for wood-burning stoves. Depict the initial equilibrium price and quantity.
b) Show the effect of higher heating oil prices on the equilibrium. What kind of goods are heating oil and wood-burning stoves? Why?
c) Draw a supply and demand diagram of the market for firewood. Show the initial equilibrium. Illustrate what happens as a result of (b). What kind of goods are wood-burning stoves and firewood? Why?
3. Consumers prefer energy-saving household appliances more than before.
a) Draw a diagram of the market for energy-efficient household appliances. Mark the initial equilibrium price and quantity.
b) Show what happened when energy prices rose. Which determinant of demand or supply changed?
Source Greg Farrell, "Fuel prices prompt return to energy-saving strategies," USA Today, January 17, 2001.

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