Power System Optimization

Chapter 3Optimization Approaches in Microeconomics and Game Theory

Microeconomics is a branch of economics that studies the behavior of individuals and small impacting organizations in making decisions on the allocation of limited resources [84]. Typically, it applies to markets where goods or services are bought and sold. Microeconomics examines how these decisions and behaviors affect the supply and demand for goods and services, which determines prices, and how prices, in turn, determine the quantity supplied and quantity demanded of goods and services. Mathematical optimization is a basic tool for microeconomics, and the most important application of microeconomics in power systems is electricity markets.

Here, we will give an example of economic analysis for explanation of the fundamental concepts. In this chapter we will examine a model of a particular market for home energy consumption. Typical energy consumption in the home includes space heating, air conditioning, water heating, lighting, and electric appliances, and they are supplied through electricity or natural gas. In some countries such as the United States, electricity and natural gas are often provided by different companies; and some states such as Texas have established a retail electricity market in which the electricity providers offer different electricity plans for customers to choose. To some extent, electricity and natural gas are so-called substitute goods, which means that one can be used to replace ...