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Lecture 8

Derived Demand
The demand for energy is derived from what it does for you.
Solving for the demand for electricity as a function of its price
Capital is important in the production of most energy services
Capital and energy are complements - increasing the price of one decreases demand for both
There has been enormous progress in technologies for energy services - auto technology advanced 2.6%/year, 1980-2006
Making lighting more efficient would raise the demand for lighting
Making cars more efficient makes driving cheaper, and should increase driving
Making lighting more efficient raises the demand for electricity.
CAFE standards may have increased the demand for gasoline - Rebound effect - the price of gasoline goes up, people drive less. Cars get cheaper to drive, people drive more.
In the long run, expect more change. More flexibility
The demand for electricity is a function of the price of electricity and the efficiency of lighting
Most energy-transforming and energy-using capital are very long-lived: houses, cars, etc.
Past investment decisions shape future costs & options
If a change is maintained over time the response will be greater than if the change happens today and gets reversed tomorrow.
The previous maximum cost decides the kind of lifestyle people live - cars, heat

Cost of rapid cuts in CO2 : either drastically cut energy services or scrap & replace existing assets prematurely
Not possible in principle to estimate demand without data on some variable that shifts the supply curve Similarly, need demand shifters to estimate the supply curve
Durable assets (structures, cities) in energy full response to changes in price, can take a long time

Demand Estimation: Results
The difference is huge between the short run and the long run
If you double price you will reduce consumption by less than half
Double income - double demand

Electricity growth
70's 4%
80's 3%
90's 2%
and now 1%