Power Shortage 3

OTHMAN YEOP ABDULLAH GRADUATE SCHOOL OF BUSINESS
SESSION A181
OEEM6013
ECONOMICS FOR BUSINESS
ASSIGNMENT 3
CASE STUDY:
1. Star Hub : English Premier League
2. Resolving China’s Power Shortage
PREPARED FOR : PROF. DR. K. KUPERAN A/L K.V.S.N VISWANATHAN

PREPARED BY : ANISA MUHAMMAD NUR 823034
: CHERRIE
SUBMISSION DATE : 2 DECEMBER 2018
This study source was downloaded by 100000773960326 from CourseHero.com on 07-05-2022 01:11:48 GMT -05:00
https://www.coursehero.com/file/40198099/NISA-CASE-STUDYdocx/
CASE STUDY 1
STAR HUB: ENGLISH PREMIER LEAGUE
Case Summary
1. Identify changes in demand and costs (fixed and marginal costs relative to the number
of subscribers) arising from StarHub’s acquisition of the EPL rights.
2. Which of the changes in (a) would be relevant to StarHub’s pricing of cable
TV services?
3. Do you think that, prior to the 2007 price increases; StarHub’s prices had maximized
profits?
4. From the viewpoint of a content provider like ESPN which receives a per
customer royalty from a cable TV operator, explain the moral hazard to which the
cable TV operator is subject.
5. From the viewpoint of EPL, explain how a lump-sum bid would resolve asymmetry
of information between EPL and cable TV operators.
CASE STUDY 3
RESOLVING CHINA POWER SHORTAGE
Case Summary
1
China’s facing one of the worst energy crises in history. The production cannot match the
demand from both industrial sector and consumption sector. Some estimate that the energy
shortage would soon reach 30 million kilowatt, which is more than double Shanghai’s peak
consumption. Many actions have been implemented such as limited coal exports, regulation
of electricity industry, increase transportation efficiency and the reduction of coal price for
power plant. However, these not come to the end and China’s still facing huge problem of
shortage. In fact, coal suppliers tend to ignore contract price set by the government and sell
it on the spot market to earn high profit. This led to cut-off production for some power
plants which may lead to higher shortage between demand and supply. The available option
for government is increase the electric price. One big question is if the price adjustment will
solve the problem or make it becomes worse. To find out the answer, it’s essential to
understand the basic knowledge of demand-supply, elasticity and other managerial
economics concepts.
1. Explain how the impact of a price increase on electricity consumption depends on the
price elasticity on demand.

Generally, price elasticity of demand measures the ratio of the proportionate change of
the quantity demanded of a goods or services to the proportionate change of the price.
An elasticity of demand ratio can be calculated by the percentage change in quantity
and the percentage change in the demand determinant factor, ceteris paribus. In
elasticity of
price, we have the formula to calculate:
ΔQ / Q
Ep: ΔP/ P
In this case, Chinese government applied the elasticity concept into the situation,
governors must estimate the price elasticity of demand to understand whether their
adjustment can be effective or not. Elasticity in turn depends in many factors. Firstly,
price elasticity depends on necessity level. The higher necessity the goods is, the less
elastic the demand become. Secondly, the substitute availability also define price
2
elasticity. When the goods has many available substitution or the price of switching is
cheap, its demand elasticity is quite high.
Electricity is now an important part of homes and industries, Almost devices at home,
businesses and industries are running because of electricity. Thus, the increases of price
would not cut-off the electricity consumption by much. So. In short, price elasticity of
electricity in china is somehow small or even inelastic. An increase in price might lead to
very small cut-off in total consumption.
2. The price elasticity of the Indian demand for electricity has been estimated to be - 0.65
among residential users and - 0.45 among industrial users. If these elasticities apply to
China as well, how will the impact of a price increase be spread between residential as
compared with industrial users?
The demand elasticity of electricity in India is -0.65 among residential users and -0.45
among industrial users. These numbers mean that any 1% increase in electricity price
lead to a decrease of 0.45% in industrial sector and 0.65% in residential sectors. It show
that residential users are more price sensitive than industrial users. India have a
similarities with china, both are developing country with high population that required
high capacity of power consumption for daily basis. In order for china to cut electricity
consumption effectively, government should apply this Indian elasticity of demand by
increasing the price of electricity among residential users’ more than industrial users,
because they have more elastic demand than industrial users. Residential may react fast
towards the prices rises by reducing the electricity consumption. 1% increase in prices
among residential users will cause 0.65% decrease for electric consumption and only
0.45% decrease for industrial users. The spread (0.2%) have impact on how the
government should price between two users to reduce the shortage.
3. Many Chinese organizations ignore the market system. For instance, they borrow
money from banks and refuse to repay, thus creating “bad debts” for lenders.
Likewise, they might consume electricity without bothering to pay the power supplier.
Do such organizations cause the demand for electricity to be more or less price elastic?
3
In this situation, Chinese organization consume the electricity for their business
operation but have no intention to pay the bills, this will cause the price of elasticity of
demand for the electricity to be less elastic (more inelastic). Even though, the price of
power increase they are not concerned on how to control or change their usage of
consumption and therefore percentage change in price will be greater than percentage
change in quantity. This situation make the effort of increasing the price to save energy
less effective.
4. Suppose that the Chinese government regulates the electricity industry through
marginal cost pricing.
(a) How does the contract price of the thermal coal affect an electric power plant’s
marginal cost?
Marginal cost can be define as (TC-FC)/Q, In this situation, when contract price is set
for the thermal coal below the market price. This will decrease the variable cost (VC)
of power plans to produce more kilowatt. Thus, marginal cost for power plan will
reduce due to decreasing of input cost (VC) and as a result will decrease the total
cost (TC) for power plant to generate electricity. However, mining company against
the contract price and sold the coal at spot market to maximize their profit and if the
power plants want to increase production power plant need to face high level of MC.
But if the mining company is obliged to provide all the demanded amount follow the
contract price, supplier may bear all the costs which lead to profit reduction.
(b) If the contract price were raised to 99 % of the spot market price, how would that
affect the electric power plant’s production?
If the contract price were raised to 99 % of the spot market price, the VC of the
power plant will increase and will cause the MC and TC of power plant’s production
increase and this will affect the company profit to be decrease. The increase of the
4
price of thermal coal will shift the power plant’s supply curve shift to the left. Thus,
using the marginal cost pricing, the government would need to increase the price to
equal the new marginal cost and avoid the power shortage.
5

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OTHMAN YEOP ABDULLAH GRADUATE SCHOOL OF BUSINESS

PREPARED FOR : PROF. DR. K. KUPERAN A/L K.V.S.N VISWANATHAN

STAR HUB: ENGLISH PREMIER LEAGUE

of subscribers) arising from StarHub’s acquisition of the EPL rights.

2. Which of the changes in (a) would be relevant to StarHub’s pricing of cable

cable TV operator is subject.

of information between EPL and cable TV operators.

RESOLVING CHINA POWER SHORTAGE

understand the basic knowledge of demand-supply, elasticity and other managerial

price elasticity on demand.

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