Microeconomic situation and its analysis 10 pages

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).

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







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







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)

Total Fixed Cost

Total Variable Cost

Total Costs

Marginal Costs















The profit maximization or loss minimization output is obtained at the output level where the marginal cost and marginal revenue are equal. In the same manner it will be the same output level where the highest level of profit or minimal level of loss is attained.

Supply Determinants

The law of supply states that with everything remaining constant, when the price of a commodity increases, the quantity that is supplied also increases.

Determinants of supply of solar panels:

The supply of solar panels is determined by several things. Some of these things include:

i. The price of oil — Solar power which is categorized as a renewable source of energy competes with oil. Therefore they are substitute goods. If the price of oil increases the supply for solar power increases.

ii. The price of inputs for the production of solar panels: The increase in the production costs of the solar panels will decrease the quantity supplied.

iii. The kind of technology employed as well as the developments in the technologies: Technology plays a great role in this industry. For instance, the technology used by China is vastly different to that of the United States. Therefore if Chinese solar panels are introduced into the market, the supply for American solar panels will decrease as consumers will insist on Chinese commodities as they are cheaper.

iv. The taxation on the suppliers: The increase in taxation to the suppliers of solar power through solar panels will decrease the supply quantity

v. The subsidies handed out: Subsidies handed out by the government decreases the costs of production and therefore increases the level of supply.

vi. The profit expectations: If the supplier expects or intends on making great profit then the quantity supplied will be high in order to increase revenue levels.

Price Elasticity of Supply

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

Price elasticity of supply = Percentage change in quantity supplied / Percentage change in price

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

= 0.8222

Therefore, the price elasticity of supply is inelastic.

Supply Curves

Price in dollars









Quantity (In thousands)

Figure 3:

The figure above shows the supply curve Ss. 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 supply.

Price in dollars









Quantity (In thousands)

Figure 4:

The figure above shows the supply curve Ss. Due to the subsidies and tariffs handed by the government, the price increase causes an increase in the supply.

In the majority of the nations, natural gas is in general transacted individualistically irrespective of oil, with its association to crude prices dwindling and decreasing. It can be deemed that in the short-term, services might necessitate natural gas more than solar energy, but it is not anticipated that decreased fossil fuel prices will have any serious effect on the demand for solar energy. This is somewhat due to the fact that renewable energy which in this case is solar energy largely obtains subsidies from governments, a feature that is likely to continue in the forthcoming (Shaffer, 2014). This implies that in the short-term, due to the decrease in oil prices, the profits will not be as great but will be normal. But in the medium to long run, it is expected that the profits will be supernormal. This is for the reason that the world is inclining more and more to renewable sources of energy and with the sunlight offering free cost, it is deemed that there will be a great demand increase for solar panels in the medium to long run.

Economic Justification

The microeconomic analysis of solar power energy must take into account numerous aspects that distinguish solar power as a source of energy. To begin with, the fuel of solar power is actually free as it comes directly from the sun. As a result, the variable costs that are related with the generation of solar power are very minimal (Baker, Fowlie, Lemoine and Reynolds, 2013). Secondly, by increasing the solar power capacity in terms of grid connectivity characteristically dislodges the generation and supply of fossil fuel and in this manner decreases operating expenses, the emission of greenhouse gases, as well as other contaminants. Thirdly, the generation of solar electricity cannot be dispatched. This implies that there is no constant need for placing the on switch and the off switch as the whole system works when the sun comes out and shines (Bosetti, Catenacci, Fiorese, and Verdolini, 2012; Borenstein, 2008).

In present moments, there has been a great incentive for individuals and the world at large to switch from using fossil fuels to renewable sources of energy such as solar power energy. As is well-known, solar power is deemed to be a substitute product for solar energy. This is for the reason that when the price for oil goes up and increases, this stirs up the use of substitute products, in this case, solar energy. In addition, it also substitutes away inputs which will have also gone up in terms of prices as a result of increased commodity prices and in turn to a decrease in the supply of commodities. Bearing this in mind, there are two economic aspects to consider. This encompasses whether the recent decrease in oil prices will have an impact on solar power energy as a substitute and also impact on the marginal product of labor.

In accordance to the basic laws of demand and supply, it is expected that being a substitute, the recent decrease in price of oil should in turn have a negative impact on solar power by decreasing its demand. In the past, a decrease in the prices of fossil fuels has affected the resources of renewable energy. For instance, at the period leading to the 1990s, cheap prices of oil and natural gas negatively impacted the markets for solar and wind energy (Hering, 2014). However, according to economists, things have changed and are completely different in the 21st century. It is deemed that solar power and fossil fuels have stopped being considered substitute goods. This is for the reason that petroleum generated fuels only account for a mere five percent of the worldwide generation of power in the present day. Variations or rise and fall in oil prices have a slight impact if at all any on solar or several other renewable energy sources. This is comparatively why the economic suggestion of solar power energy is so persuasive, exceptional and valuable (Herring, 2014).

In addition, the aspect of labor and solar energy are not close substitutes. This is for the reason that there will be no issue of an increase in energy costs. The sunlight that is vital for the generation of the power is free and at no point will be charged. This therefore will not have any negative shift in the marginal product of labor. However, the supply side effects do take place because they are not affected by costs or by the flexibility or inflexibility of ages. Different from fossil fuels, solar energy does not have any major impacts on the shift in demand and supply sides when it comes to actual employment. As is well-known, a decrease or an increase in oil prices has a major impact on employment and also the prices of commodities. Without a doubt, in China, Europe and the United States natural gas offers more competitiveness for renewable energy in comparison to oil. In these states, natural gas is in general transacted individualistically irrespective of oil, with its association to crude prices dwindling and decreasing. It can be deemed that in the short-term, services might necessitate natural gas more than solar energy, but it is not anticipated that decreased fossil fuel prices will have any serious effect on the demand for solar energy. This is somewhat due to the fact that renewable energy which in this case is solar energy largely obtains subsidies from governments, a feature that is likely to continue in the forthcoming (Shaffer, 2014).


I would recommend that Cindy ought to invest into solar panels. This is for the reason that as explained above, the current decrease and future decrease in the price of oil will not have any impact on the demand or price of solar power energy. The government is also keen to protect the local industry in terms of renewable energy by ensuring that the commodities such as solar panels from China which are cheaper and marked down do not have an impact on the prices of the locally made solar panels here in the United States. In addition, the government is offering incentives in terms of tariffs and subsidies to the suppliers of solar panels (Hubbard and Brien, 2013). Lastly, it can be perceived that the market structure of the solar panel industry is not a monopoly. This implies that it would not be difficult for Cindy to gain access into the industry as a new entrant to the market. With regards to startup capital, it would be deemed okay if Cindy started out with her own capital in order to avoid any kind of debts with institutions. This is based on the economic analysis that the market for solar panels is bound to boom in the medium to long run period.


Baker, E., Fowlie, M., Lemoine, D., Reynolds, S. (2013). The Economics of Solar Electricity. Energy Institute at Haas.

Borenstein, S. (2008). The market value and cost of solar photovoltaic electricity production. Center for the Study of Energy Markets Working Paper 176. University of California Energy Institute.

Bosetti, V., Catenacci, M., Fiorese, G., Verdolini, E. (2012). The future prospect of PV and CSP solar technologies: An expert elicitation survey. Energy Policy, 49:308 — 317.

Brown, P.S. (2006). Making Sense of High Oil Prices: A Conversation with Stephen P.A. Brown.FRB Dallas Southern Economy, Issue 4, July/August, pp. 8-9.

Frankel, D., Ostrowski, K., Pinner, D. (2014). The disruptive potential of solar power: As costs fall, the importance of solar power to senior executives is rising, McKinsey Quarterly.

Hering, G. (2014). What plummeting oil prices mean for renewable energy. The Guardian. Retrieved from: http://www.theguardian.com/sustainable-business/2014/nov/10/crude-oil-texas-renewable-energy-solar-biomass

Hubbard, R., & Brien, A. (2013). Technology, Production, and Cost. In Economics (4th ed., pp. 374-375). Boston: Pearson.

Parkin, M. (2014). Microeconomics. New York: Pearson Publishers.

Ponce, M. & Neumann, A. 2013. Elasticities of Supply for the U.S. Natural Gas Market- Unpublished manuscript.

Sheffer, L. (2014). Will oil’s drop hurt renewable energy? CNBC. Retrieved: http://www.cnbc.com/id/102242056#.

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