Question

If price of electricity doubles due to power generating capacity is unable to keep up with the fast growing demand for recharging electric vehicles:

1. initially which determinant of demand or supply (pick one or the other) for household-owned electric cars will be primarily affected?

2. will the demand or supply (picked from #1) of electric cars increase or decrease?

3. briefly explain why that is or draw a diagram

4. as a result of this increase in electricity prices, will the equilibrium price of electric cars be higher or lower than it would have been otherwise?

Answer 1

Solution:

1. With higher price of electricity, which is used with electric cars (so electricity and electric cars are complements), we can say that demand is primarily affected.

2. The demand of electric cars will decrease.

3. As already indicated, electricity and electric cars are complements, and so when price of electricity increases, it becomes more expensive to consume electric cars. As a result, demand for electric car will decrease, via decrease in demand and consumption of electricity.

4. As price of electricity increases, demand for electric cars decrease, shifting the demand curve of electric cars to the left. With supply unchanged, the new equilibrium price of electric cars will be higher than it would have been otherwise.