Microeconomic Situation and Its Analysis Case Study

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Microeconomics Analysis

Cindy is making a consideration to investing in a new business consists of the installation of solar panels. In the current periods, this has been perceived as a profit making venture. This is for the reason that the world continues to shift more and more into renewable sources of energy of which solar power energy is one of the leading ones. Another reason is that the government has made incentives to the industry by giving out subsidies to the suppliers in this market so as to increase the number of solar panels being produced. Bearing this in mind, Cindy is necessitated to take two decisions. First of all, there is a need to review the probable or likely profit or loss that can come about in this business in the forthcoming by making an allowance for the impending prospects for this line of business. Cindy needs to take a keen look at the macroeconomic environment or the external environment in order for her to make a resolution. The second decision is to pick out whether to invest her own money and capital or instead opt to borrow the funds if she does decide on starting the business. For this particular aspect, there is no pertinent information that has been provided.

Article Information

The article that is provided is well written, offering a strong examination of the solar power industry and the solar panel market which is actually part and parcel of the industry. The article enlightens and notifies us that the government is entirely in support of the whole notion of solar power and intends to push it to become a key source of energy in the future periods. As a result of this, the government has given substantial subsidies to the solar power industry. The high price and expense of panels is an issue that is deemed to be a hindrance to the growth of this industry, for which the government is responding by dishing out subsidies. For instance, the government has dished out one hundred and fifty million dollars as a loan assurance to a company known as 1366 technologies which is a manufacturing company for solar wafers as it considers it to have extraordinary extents of new technology. The Department of Energy has also gone ahead and offered twelve billion as assurances for loans to sixteen solar projects. The forthcoming growth of this market area is very nearly assured.

Making consideration of the impact of the subsidies shows that it definitely affects the solar power demand and supply forces. The subsidies given by the government and the department of energy push down the supply curve, as the manufacturers increase supply of solar panels for the reason that they have monetary and economic assistance from the government and DOE to recover their high prices and expenses. Basing this on the natural forces of demand and supply, the right shift of the supply curve causes the prices to fall, while the quantity of panels rises. This is for the reason that a decrease in price causes a decrease in the production costs which in turn increases the level of supply in the market.

Demand Determinants

The law of demand claims that with everything else continues to be constant, the increase in price of a commodity brings about a decline in demand and a decrease in the cost of a commodity brings about an increase in demand.

Determinants of solar power demand

Determinants of demand can also be described as the factors that affect demand. In other words, these are the factors which bring about a shift in the demand curve. A change in the determinants of the demand will bring about a change in demand even if the price is not changed and remains constant. Some of the demand determinants of solar power include:

i. Number of consumers:

The change in the number of consumers directly impacts the quantity of the commodity demanded at every price level. When consumers increase, demand is expected to increase and if buyers decrease, then demand is expected to decrease. Solar power is gradually being a prominent source of energy not only in the United States but also in the world. Solar power is simply an economical, unsoiled, suitable, dependable source of energy. Consumers of solar power have increases particularly in the past number of years with the financial crisis increasing the prices of fossil fuel (Frankel, Otrowski and Pinner, 2014).

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ii. Price of related goods:

There are two kinds of related goods which are substitute and complimentary goods. Solar power is a natural renewable source of energy. The change in price of a substitute of a commodity generally impacts the demand of the commodity in a direct manner. For instance, in this case, the decrease in price of solar power technology will bring about a decrease in the demand for customary electric power. On the other hand, the demand for a commodity changes inversely with a change in price of a complementary good. For instance, in this case, the decrease in price of drilling fossil fuel will increase the demand for fuel.

iii. Income:

The change in income affects demand directly in numerous instances. Increase in income of buyers will allow them to purchase more thus demand will be increased and a decrease in income will limit their consumptions therefore demand will be decreased. Currently, with respect to solar power, the consumers' income seems to have increased due to the gradual decrease in the price of oil. It is known that high prices of oil can have a decreasing effect on the demand for other commodities for the reason that they decrease the income of the consumers (Brown, 2006). The decrease in oil prices at the moment can be perceived and analyzed as a lower taxation level on the customers (Ponce and Newumann, 2013). The extra amount of money which the consumers no longer have to spend on oil will shift to installing solar panels which they consider to be a technology for the future which is deemed to be much cheaper in the forthcoming periods.

Data Information:

Solar panels continue to be manufactured in different nations such as the United States and China as well as others. In this data calculation, the assumption is that primarily, all of the solar panels that are used are all manufactured in the country. The figure below expounds on this situation with the demand curve labeled as DS. We assume that the global price which is P0 is $200 for every solar panel which is parallel to the price in the nation devoid of any trade. The other assumption is that the quantity demanded and quantity supplied of the solar panels is the same and equals to 4,000 panels weekly.

However, with the entry of Chinese firms into the market, the global price of the panels decreases to $170 for every commodity. Since the producers in the nation are not able to compete with such, they are forced to cut down production of the panels to 1,000 weekly. This in turn implies that the in general the units used in homes increase to 5,000 but of which 4,000 are from importation.

This brings about the tariffs and subsidies used by the government as incentives and protection of the local industry. This causes the price in the nation to increase back to $200 for each commodity. With this price per commodity, the quantity of panels produced increase to 3,000 weekly but due to the forces of demand and supply, the quantity being set up decreases by 1,000 units which in turn clears out the imported commodities. This can be exemplified in the second figure (Parkin, 2014).

Price Elasticity of Demand

Price elasticity of demand refers to a measure of the degree of responsiveness of the quantity demanded of a commodity to changes in its own price. It is calculated using the following formula:

Price elasticity of demand = Percentage change in quantity demanded / Percentage change in price

Using the midpoint formula the elasticity of demand is calculated as follows:

EMBED Equation.DSMT4

= 0.8222

Therefore, the price elasticity of demand is inelastic.

Demand Curves

Price in dollars

P0

P1

Ds

0

4

5

Quantity in thousands

Figure 1:

The figure above shows the demand curve Ds. Due to the entry of suppliers and determinants such as technology as well as price of related goods, the price decrease causes an increase in the demand.

Price in dollars

P0

P1

Ds

0

4

5

Quantity in thousands

Figure 2:

The figure above shows the demand curve Ds. Due to the tariffs and subsidies the price increase causes a decrease in the demand.

Cost Analysis

The following data is hypothetical and will be used to make cost analysis for fixed costs, variable costs, and marginal costs

Output (Q).....

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