An online article on Forbes reports the solar power supply chain sector will struggle to keep up with the growing number of solar power projects in 2016, especially, the solar wafer suppliers. The estimated additional solar capacity this year is 60 gigawatts (GW) or 33 percent more than the last year figure. The growth of solar power sector has been creating challenges for manufacturers of solar cells, wafers, and polysilicon who are running out of spare capacity. The manufacturers of solar wafers are, particularly, in a challenging situation because expanding production capacity for solar wafers is more capital intensive than it is for solar panels. Even if the top 10 wafer suppliers operate at the full capacity in 2016, the demand may still exceed the supply by 5.5 GW. IHS Technology estimates the gap could be even bigger, depending upon the government policies around the world which may further boost demand for solar power (Pentland, 2015).
There are several economist concepts applicable to this article. First of all, the quantity demanded is expected to exceed the quantity supplier for solar wafers which means the price of solar wafers will rise next year. It is reasonable to assume the price elasticity of demand for solar wafers is inelastic because there are not close or reliable substitutes to solar wafer. Thus, the price of solar wafers will most likely by a greater proportion than the proportional increase in the quantity demanded for solar wafers. This also means the total revenue for solar wafer suppliers will rise because the total revenue is increased with an increase in price when the price elasticity of demand for a product is inelastic (Investopedia). Similarly, the total profit of solar wafer suppliers will also rise because their average total costs may slightly decline as they use up remaining production capacity while their average revenue will rise due to higher prices.
The article informs us the wafer suppliers will struggle to increase production capacity because it is quite capital intensive. Thus, it is apparent the supply of solar wafer will mostly remain the same in the short run since some factors are fixed. But the supply of wafers will increase in the long run as the solar wafer suppliers will have expanded the production capacities. It is not surprising because all the factors of the production are variable in the long run (Mankiw, 2011). The solar wafer suppliers may also face declining marginal physical product as they may have to hire more workers to meet the rising demand while the total production capacity will remain fixed in the short run. The total production may increase as the firms try to utilize the remaining capacity but it may not increase as fast as the number of additional workers.
The solar wafer suppliers are in a difficult situation because they don’t have much excess production capacity left. The quantity demanded for solar wafer and other solar supplies is expected to significantly increase next year and it is highly likely for the quantity demanded to exceed the quantity supplied because solar wafers cannot increase production capacity without first incurring significant capital investment. The gap between the quantity demanded and the quantity supplied may be even greater if the governments around the world adopt more clean energy-friendly policies as China has recently done. The prices for solar wafers will most likely rise at a greater pace than the quantity demanded because the customers have no option of a reliable substitute which should result in both higher total revenue and total profits for the solar wafer suppliers.
- Investopedia. (n.d.). Price Elasticity Of Demand. Retrieved December 17, 2015. Web.
- Mankiw, N. G. (2011). Principles of Microeconomics (6th ed.). Cengage Learning. Print.
- Pentland, W. (2015, October 29). Strong Demand Strains Solar Supply Chain, Potential Wafer Shortage In 2016. Retrieved December 17, 2015. Web.