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Economics Of Electricity

This page pertains to the economic significance of electricity in most industries today. I will even (very) briefly discuss the history of this.


  1. Introduction
  2. How economically important are electricity prices?
  3. Side effects of increased electricity prices
  4. Side effects of decreased electricity prices
  5. Energy Diversity
  6. Capital intensive production and unemployment


Electricity is used by everyone and for a very wide variety of purposes. Residents and businesses) use it to power appliances such as refrigerators, air conditioners, stoves, televisions, computers, heaters, hospital instruments such as heart monitors and dialysis machines, and so on.

It is also required to power water pumps which help to provide people with a water supply.

Electricity is crucial to the welfare of the world’s economy today, especially today because it’s use is much more widespread than it used to be. It is now being used to power factory robots which do more than one would have thought possible in the past, such as cutting wood, metal, plastic, baking cookies, synthesizing a variety of chemicals, and producing mind bogglingly complex devices in a matter of minutes and even seconds. People use to carry out these tasks by hand in the past, meaning that today, manufacturing processes are much more capital intensive than the labour intensive manufacturing methods of the past. A capital intensive business is not just one which utilizes robots heavily to perform tasks, but they also utilize computers heavily to automate a variety of tasks. One computer can now do the job of many people, and very quickly.

How economically important are electricity prices?

The cost to manufacture items includes expenses such, as water, electricity, wages and salaries, other raw materials (such as iron, copper, aluminium, lithium, magnesium, etc), cleaning, machine repair, insurance, etc, but one of the more significant manufacturing expenses is electricity. In order for manufacturers to recover the expenses mentioned above, they have to include them in the price of the goods and/or services that they offer and they also mark up the price so they can make a profit.

The reason why electricity prices can affect the cost of services is because a considerable fraction of the cost of services is electricity. For example: A website host’s electricity expenses are of significant importance to the cost to host websites because of the power consumption of the web servers.

Example 2: Air conditioning is a common and considerable (sometimes very significant) expense of most organizations because of it’s high cost and extremely high power consumption (several hundred to more than 1,000 watts per room). One reason for that is that offices are often air conditioned.

As the cost of electricity increases, the electricity bills of businesses increases, therefore, if their retail markup is not already extremely high, they may have to increase the cost of their goods and services to compensate for their higher electricity bills. You can definitely expect this if the cost of electricity increases significantly and for an extended period of time.

Side Effects of Increased Electricity Prices

If the cost of electricity was to explode significantly, and for an extended period of time, then the cost of goods and services could increase significantly as well, depending on how businesses handle the price increase because some of them can sometimes offset such increases. A possible consequences of more expensive goods and services is decreased demand for them, resulting in an income reduction for businesses, which can lead to the inability to pay all of the employees, possibly resulting in employee shedding.

Side Effects of Decreased Electricity Prices

Everything has its advantages and disadvantages. Decreased electricity prices usually results in higher electricity demand, if the cost decrease is significant. Higher demand can cause:

  • Increased strain on the electricity grid which can result in blackouts and brownouts if it is already overstressed.
  • Increased fuel combustion due to more power plants or upgrades to more powerful generators or the addition of new ones. This results in increased powerplant emissions of toxic substances or greenhouse gases such as carbon dioxide (CO2) in the case of fossil fueled power plants (gasoline, diesel, coal, natural gas), which causes global warming.
  • Increased consumption of foreign petroleum in the case of countries which don’t own enough oil. This is considered to be a national security issue if the country or countries that the oil is being imported from is an enemy of yours.

Energy Diversity

Energy diversity is an economically (and I would also say environmentally) important topic because it pertains to not only the utilization of the right energy sources in the right places (for example, wind turbines in sufficiently windy areas, solar in sufficiently sunny areas, geothermal where there are suitable geothermal hotspots, etc), but also to the importance of the effect that fuel demand has on fuel prices. For example: The more widespread a source of energy such as coal is used, the more coal will be required, and that results in higher coal prices. Utilizing a variety of sources of energy means that the demand for the fuel for each type of generator will be less, resulting in less expensive electricity in most cases (nuclear is a bit different). From an environmental standpoint, utilizing more low (or zero) emissions sources of energy in place of highly polluting sources such as coal results in less emissions.

Capital-Intensive Production and Unemployment

Electricity has facilitated capital-intensive manufacturing on an enormous scale, leading some to believe that it is economically harmful. While the switch to capital-intensive manufacturing increased energy usage, the energy cost of goods is offset by the overall reduction of their production cost. One might think initially that more capital intensive production would result in increased unemployment.

This is true to some extent, but the increased use of automated high speed accurate robots has decreased production cost and increased productivity so much that sales increased, and an increase in sales due to lower product cost results in greater revenue which makes it more viable for businesses to open more factories to meet product demand. The cheaper products are, the more capable people are of buying them, often resulting in more sales.

More sales results in the need for more repair centers as well as more stores and dealerships, and they hire people as well. So even though factories may hire less people each due to the increased use of robots, there are more factories to hire people and to help offset job losses.

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