School of Social Sciences

Universiti Sains Malaysia

Semester 1, 2020/2021

SEU337 Energy Economics

Tutorial 1

(1) Explain, how do the following events affect the demand, supply and price in the coal
market? Use a diagram to explain your answer

a) The financial crisis has caused the economic downturn in Asia. Several areas of coal
were destroyed due to the war in a major coal-producing country.

b) Suppose the federal government loosened the money supply to reduce interest rates
and induce inflation so that cost of capital will reduce.

(2) Use the following competitive model of the coal market to answer the following questions:

𝑄𝑑 = 150 − 3𝑃𝑐 + 1.5𝑃𝑠𝑏 − 5𝑃𝑐𝑚 + 0.4𝑌

𝑄𝑠 = −30 + 5𝑃𝑐 − 3𝑃𝑘 − 0.5𝑃𝑙 − 0.8𝑃𝑛𝑟

Where,
𝑃𝑐 = the price of coal
𝑃𝑠𝑏 = the price of a substitute to coal such as natural gas = 15
𝑃𝑐𝑚 = a compliment to gas consumption such as gas boiler = 10
𝑌 = a measure of economic activity = 100
𝑃𝑘 = the price of capital = 2
𝑃𝑙 = the price of labor = 3
𝑃𝑛𝑟 = the price of other natural resources used in production of coal = 5

(a) What is the inverse supply equation?

(b) What is the inverse demand equation?

(c) Calculate the equilibrium price and quantity

(d) Explain what will happen if income increased in this market?

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(3) Suppose the demand and supply for the coal market is as follows:

𝑄𝑑 = 87.5 − 2𝑃𝑐

𝑄𝑠 = −14.5 + 2𝑃𝑐

Where,

𝑄𝑑 = the quantity demanded in metric tons,

𝑄𝑠 = the quantity offered in metric tons,
𝑃𝑐 = the price of coal

(a) Using an appropriate diagram, calculate the equilibrium price and quantity.

(b) If the market price of coal changes to RM20, what will happen to the market
equilibirum? Show the changes using an appropriate diagram.

(c) If the government implements a minimum price policy of RM30, what will happen to
the market equilibirum? Show the changes using an appropriate diagram.

(4) Consumption of coal in Bimbo Land is 280 million metric tons. If the price of coal increases
from $ 200 to $ 240 per metric tonne and the price elasticity is -0.5, what is the current use
of coal?

(5) Energy consumption adjusts over time in a variety of ways. As income or production (Y)
increases, we expect that energy consumption will increase. As economies evolve and
industrialize, there may be a relative shift in the economy towards more energy intensive
sectors such as heavy manufacturing. We will calculate this production share of sector i (Si)
as the production in sector i (Yi) divided by total production or Si= Yi/Y. Once
industrialized, economies may then shift relatively more of their activities to the less energy
intensive service sector. In addition, there may be technology change in each sector changing
the energy intensity in each sector. Energy intensity in sector i is measured as energy
consumption over income (Ei/Yi).

Suppose you have the following two sector economy, Y and E are total production and total
energy consumption while Yi and Ei are production and energy consumption in sector i.

Y Y1 Y2 E E1 E2
2000 100 40 60 27 12 15
2010 200 50 150 70 40 30

Between Sectors 1 and 2,

(a) Which is the larger sector?

(b) Which is the faster growing sector?

(c) Which is the least energy intensive sector?