Skip to 0 minutes and 14 seconds Also, consumers are believed to pursue their own interests. The economic notion for their interest is called “utility.” In its essence, utility is not a monetary quantity, but the value consumers attach to a specific utilisation of goods. If a consumer faces the choice of using one unit for electricity, for instance, in order to heat her house or to use that unit for lighting, the optimal choice depends on the value she attaches to these alternative uses of electricity. This value may change over time. During a cold winter day, the value of lighting is negligible, while the value of heating will be high. The value differs also among consumers. Consumers are viewed to have different preferences.
Skip to 1 minute and 3 seconds These different preferences can be expressed by the so-called “demand curve.” This curve depicts the value different consumers attach to a specific good. By ranking this value from the highest level to the lowest, generally, the demand curve is downward-sloping. The slope of the curve is determined by the price elasticity of demand. If consumers are sensitive to the price of goods, the demand decreases strongly if the price increases. In general, the price elasticity of energy demand is low. This price elasticity, of course, depends strongly on the type of use. For energy demand for basic services, such as lighting in houses, the price elasticity is low while the price elasticity of energy demand for industrial uses appears to be higher.
Skip to 1 minute and 59 seconds The magnitude of the price elasticity is not just a nice to know fact. It’s highly relevant for the potential effectiveness of policies to change energy consumption. If governments raise the tax on energy for households in order to stimulate them to use energy more efficiently, the effectiveness of this measure fully depends on the price elasticity. If this elasticity is close to zero, such a tax hardly has any effect on energy use. Hence, the main effect would just be that consumers pay more taxes to the government.
What drives the decisions of energy consumers?
Now you will learn what drives your decisions as an energy consumer. Machiel explains the economic notion of utility and you see whether consumers’ preferences change over time and differ among consumers. The so-called demand curve and the related price elasticity of demand measure are used to express these preferences of consumers. Do you recognize yourself that you attach different values to alternative uses of electricity? Please share your thoughts with your fellow students in the comments section below.
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