This project report discusses pricing strategies and elasticities of electricity in India. It first defines price elasticity of demand and the factors that affect it, such as availability of substitutes and urgency. It then analyzes the elasticity of electricity demand in India when prices change. The report finds that demand is relatively inelastic in the short run but can become more elastic over the long run if investments are made. Demand is also less elastic in summer compared to winter due to electricity being more of a necessity in summer. The report also examines willingness to pay for electricity in India and finds that consumers' willingness to pay is 1.5 times the market price.

1. Project Report
MBA 2022-24
SUBJECT- MANEGERIAL ECONOMICS
TOPIC- “PRICING STRATEGIES & ELASTICITIES OF
ELECTRICITY IN INDIA”
SUBMITTED TO- DR. IRS SARMA
SUBMITTED BY-
NAME SEAT NUMBER ENROLLMENT
SHUVAYAN MANDA 46 22BSPCHH01C
RISHABH KAKKAR 47 22BSPCHH01C
RICHA MAHAJAN 48 22BSPCHH01C0910
ASHISH KUMAR PORWAL 49 22BSPCHH01C0226

2. Abstract
The Project titled “Pricing Strategies & Elasticities of Electricity in India”
The main objective of the study in this report is to find the elasticities of electricity in India and how
companies make their pricing strategies by keeping in mind the elasticity of electricity.
Here, firstly we’ll try to describe what elasticity od demand is and then we’ll find out the elasticity of
electricity in India after that how demands react to the increase or decrease of price in electricity
during winter and summer season.
Price Elasticity of Demand
Price elasticity of demand is a measurement of the change in the consumption of a product in relation
to a change in its price. Expressed mathematically, it is:
Price Elasticity of Demand = Percentage Change in Quantity Demanded ÷ Percentage Change in
Price
Economists use price elasticity to understand how supply and demand for a product change when its
price changes. Like demand, supply also has an elasticity, known as price elasticity of supply. Price
elasticity of supply refers to the relationship between change in supply and change in price. It’s
calculated by dividing the percentage change in quantity supplied by the percentage change in price.
Together, the two elasticities combine to determine what goods are produced at what prices.
Factors That Affect Price Elasticity of Demand
Availability of Substitutes
The more easily a shopper can substitute one product for another, the more the price will fall. For
example, in a world in which people like coffee and tea equally, if the price of coffee goes up, people
will have no problem switching to tea, and the demand for coffee will fall. This is because coffee and
tea are considered good substitutes for each other.
Urgency
The more discretionary a purchase is, the more its quantity of demand will fall in response to price
increases. That is, the product demand has greater elasticity.
Say you are considering buying a new washing machine, but the current one still works; it’s just old
and outdated. If the price of a new washing machine goes up, you’re likely to forgo that immediate
purchase and wait until prices go down or the current machine breaks down.
The less discretionary a product is, the less its quantity demanded will fall. Inelastic examples include
luxury items that people buy for their brand names. Addictive products are quite inelastic, as are
required add-on products, such as inkjet printer cartridges.
One thing all these products have in common is that they lack good substitutes. If you really want an
Apple iPad, then a Kindle Fire won’t do. Addicts are not dissuaded by higher prices, and only HP ink
will work in HP printers (unless you disable HP cartridge protection).
Duration of Price Change
The length of time that the price change lasts also matters. Demand response to price fluctuations is
different for a one-day sale than for a price change that lasts for a season or a year.
Clarity of time sensitivity is vital to understanding the price elasticity of demand and for comparing it
with different products. Consumers may accept a seasonal price fluctuation rather than change their
habits.

3. Types of Price Elasticity of Demand
Price elasticity of demand can be categorized according to the number calculated by dividing the
percentage change in quantity demanded by the percentage change in price. These categories include
the following:
If the percentage change in
quantity demanded divided by the
percentage change in price equals:
It is known as: Which means:
Infinity Perfectly elastic
Changes in price result in demand
declining to zero
Greater than 1 Elastic
Changes in price yield a significant
change in demand
1 Unitary
Changes in price yield equivalent
(percentage) changes in demand
Less than 1 Inelastic
Changes in price yield an
insignificant change in demand
0 Perfectly inelastic
Changes in price yield no change in
demand
What makes a product elastic?
If a price change for a product causes a substantial change in either its supply or its demand, it is
considered elastic. Generally, it means that there are acceptable substitutes for the product. Examples
would be cookies, luxury automobiles, and coffee.
What makes a product inelastic?
If a price change for a product doesn’t lead to much, if any, change in its supply or demand, it is
considered inelastic. Generally, it means that the product is considered to be a necessity or a luxury
item for addictive constituents. Examples would be gasoline, milk, and iPhones.
What is the importance of price elasticity of demand?
Knowing the price elasticity of demand of a good allows someone selling that good to make informed
decisions about pricing strategies. This metric provides sellers with information about consumer
pricing sensitivity. It is also key for makers of goods to determine manufacturing plans, as well as for
governments to assess how to impose taxes on goods.

4. Elasticity of Electricity Demand in India when Price Changes During
Different Seasons!
A clear idea of the demand-price relationship or elasticity is helpful for effective demand side
management (DSM). In this research we found that elasticity of demand can be short-run as well as
long-run. In short-run elasticity, the price-response from the system with its current infrastructure and
equipment. In long rum elasticity, investment can be made in response to the higher prices during a
longer time span. During our research we observed that electricity markets in India are relatively
Inelastic of demand, at least in the short run. Dealing with relatively inelastic demand in India leads to
the implementation of large price spikes in spot pricing markets as demand does not change much
with change in prices. During the time of our research, we found that consumer demand to the change
in price of electricity is
During Short & Long-Run
Here we found that consumer response is roughly similar for short hourly peaks and longer periods of
high price. (Ifland et al., 2012) reveal a steep slope of the demand curve from a study of the Indian
electricity market. However, this field test proves that dynamic tariffs can increase demand elasticity.
(Kirschen, 2003) also observes that implementation of dynamic pricing definitely increases the
elasticity of demand. He further notes that demand curves are steep, and shift, depending on the time
of day or day of week.
We studied the short-term price response in the electricity market of India. We studied the cross-
elasticity of demand along with self-elasticity. Cross elasticity is measured as the rate of change of
demand for one time period with respect to change in the price of another time period. By this we
were able to establish that the consumer reaction to a price increase in the short run is rare unless the
price increase is significantly high. This low demand response can be because of consumption
scheduling that involves some relatively cumbersome technology. We also observed that consumers
respond more to short term price hikes than to short-term price drops. They develop a non-linear
elasticity function from this study. However, we also found existing research (Braithwait, 2010),
which states that there can be no particular formula for determining the amount of demand response,
which varies across customer types, events, and types of price structures.
During Different Seasons (Winter & Summer)
Here, regarding the different seasons we found that Price elasticity of Demand During Summer is
more Relatively Inelastic as compared to winter season because in many parts of India like Gujrat,
Summer hits much harder than winter, temperature reaches more than 55 Centigrade which leaves no
choice to the consumer but to pay the price the supplier is asking because, as we discussed above
factors that affect the elasticity like
 Nature of Goods: As electricity comes under the category of necessity goods, Electricity is
relatively Inelastic
 Availability of Substitute: As electricity does not have any close substitute, consumer got no
choice but to pay the price supplier is asking
 Urgency: Electricity is required about all the time from powering your little bulb during dark
to powering your air conditioner when you fell warm, that is why electricity comes under
urgency

5. From the above graph we can see that consumer demand is more inelastic during the season of
summer as compared to winter, which leads us to the conclusion that consumers does not act much
with the change in price of electricity during summer as electricity during that time is more a
necessity than a comfort where as during winter season we have seen that if the price of electricity
increases consumer tries to find different ways to warm them self like putting on more clothes which
directly increase the elasticity of electricity during the winter season in India
5.75
5.8
5.85
5.9
5.95
6
6.05
6.1
6.15
6.2
12.15 12.2 12.25 12.3 12.35 12.4 12.45 12.5 12.55
Summer (Price elasticity of demand)
5.75
5.8
5.85
5.9
5.95
6
6.05
6.1
6.15
6.2
7.4 7.6 7.8 8 8.2 8.4 8.6
Winter(Price elasticity of demand)

6. Willingness-To-Pay For Electricity
Designing any pricing model requires knowledge about the consumer‘s willingness-topay (WTP) for
electricity and associated infrastructure. Here, to find consumer willingness-to-pay we analyzed
Devicienti et al, where they have used contingent valuation method to determine the WTP for
additional services and features like reliability of supply. However, a portion of the respondents do
not believe in the possibility of the improved scenario projected by the hypothetical market used in
this process.
Consumers find it difficult to comprehend electricity consumption in terms of KWh. Thus the study
phrases consumption in terms of ‘appliance capacity’ or ‘hours of use’ of each appliance. Stated
choice experiments can be helpful in this case.
Here, from this particular method we discovered that consumers‘ WTP is 1.5 times more than the
market price of electricity. We were also able to identify significant factors that influence household
WTP through an econometric data of this study of 350 households using the choice experiment
method. It indicated that the electricity industry can experience an annual economic benefit of 16.3
million USD by adding 120 MW capacity, as consumer are ready to pay more for uninteruupted
power supply