The Economics of Electricity Markets

1Introduction to Micro-economics

This book is about the economics of electricity markets. It is therefore essential that the reader understands a number of basic concepts in economics. Much of the material here can be found in introductory textbooks in economics. However, we hope that setting out this material at the start of this textbook will assist readers who do not have a background in economics.

Readers who have a background in economics may choose to skip this part. However, this presentation probably contains some new material, even for readers familiar with economics. In addition, we introduce notation and a few key ideas which are used throughout the rest of the book. We recommend at least a review of this material.

1.1 Economic Objectives

Economics is the study of the production, consumption, and exchange of goods and services in an economy – including how production, consumption, and exchange are organised, how information flows and how participants are rewarded and incentivised for playing their part. Economics seeks to both create theories which explain the patterns of behaviour and organisation that we see in the real world (so-called positive theories), and to develop policies and proposals for changing the arrangements that exist in the real world (normative theories).

But, if we are to recommend changes to existing arrangements, we need a commonly agreed set of objectives that we are trying to achieve. In our view, this common set of objectives must relate, ...