Examine two possible reasons for the change in price elasticity of demand for electricity over time

Edexcel A-Level Economics Paper 1 June 2018 Extract

The price elasticity of demand for electricity in the UK is estimated to be -0.35 in the short run and -0.85 in the long run.

With reference to Extract A and your own knowledge, examine two possible reasons for the change in price elasticity of demand for electricity over time. (8 marks) 

One reason the demand for electricity might have become more price elastic because of an increase in substitutes. The extract mentions that rival suppliers can directly contact customers. This makes it easier for consumers to see which substitutes are available. This means that consumers will be less likely to accept price increases, and demand will fall more proportionally compared to before.

Another reason the demand for electricity might have become more price elastic because the benefit of greater time. It takes time for consumers to switch energy suppliers as this might involve them learning how to use the database, or waiting for their next renewal to come up.

However, consumers may not act as rationally as the theory suggests. In reality, consumers might behave out of habits. They might be used to accepting automatic renewals rather than shopping around. Therefore, more expensive energy companies can continue to exploit customers due to their inertia.

A-Level Economics Tutoring

I offer one-to-one and small group A-Level Economics tutoring for students across the UK and internationally. With 87+ five-star Google reviews and tutoring experience since 2017, I specialise in helping students understand difficult concepts and improve their exam technique.