Q2Restructured Power System

The price elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price: Ed = (%ΔQd)/(%ΔP) = (ΔQd/Qd)/(ΔP/P). Demand is termed elastic if |Ed|>1 (quantity changes proportionally more than price), inelastic if |Ed|<1 (quantity changes proportionally less than price), and perfectly inelastic if Ed=0 (quantity does not change at all regardless of price).

Electricity demand is characteristically highly inelastic in the short run, since most consumers cannot readily adjust their consumption in real time in response to price signals — this is reflected graphically as a very steep (nearly vertical) demand curve, meaning even large price swings produce only small changes in quantity demanded within short (hourly/daily) timeframes. This inelasticity is a fundamental structural feature of electricity markets that makes them particularly vulnerable to price spikes and market power exercise during periods of tight supply-demand balance, since suppliers know that consumers cannot easily reduce consumption even if prices rise sharply.

Over longer time horizons, however, demand elasticity increases somewhat as consumers gain the ability to invest in more efficient appliances, shift some flexible loads to off-peak periods, or participate in demand-response programs that provide financial incentives for voluntary load reduction during high-price periods — this longer-run elasticity is one of the key motivations behind time-of-use tariffs, dynamic/real-time pricing, and demand-response programs in restructured markets, all aimed at making demand somewhat more responsive to price signals.

The price elasticity of supply is similarly defined as Es = (%ΔQs)/(%ΔP), measuring how responsive generators' output is to price changes. In electricity markets, supply elasticity depends heavily on the generation mix and available spare capacity margin: when substantial spare (unutilized) generation capacity exists, supply tends to be relatively elastic, since additional output can be brought online at a modest cost increase; however, as system load approaches the total available capacity, the supply curve becomes progressively steeper (less elastic), since only increasingly expensive peaking units remain available to meet additional demand, and near full capacity utilization, supply becomes essentially perfectly inelastic (a vertical supply curve), since no further output can physically be produced regardless of price — this is precisely the condition under which electricity prices can spike dramatically during periods of peak demand or unexpected generation outages, a phenomenon central to understanding price volatility and market power risk in restructured electricity markets.