The Effect of Applying the Real Price of Energy on the Elasticity of Energy Demand and Estimating Energy Substitution Elasticity in the Industrial Sector in the Long Run (A case study: industrial factories including more than 50 workers during the years 1995 to 2006)

Authors

1 Assistant professor, department of economics, Shahid Bahonar University of Kerman

2 Scientific assistant, Payame Noor University, Center of Kashmar

Abstract

Applying the real price of energy and redistribution of its
subsidies have been one of the most critical and controversial issues
in the Iranian economy in the last few years. Concerning this issue,
the industrial institutes’ reaction to the energy’s real price and its
related effects on industrial demands elasticity is especially
important. In this study, using the Translog Cost Function and
shepherd’s lemma, the function of the share of each of the production
factors has been estimated from the total cost. From these
estimations, elasticities of own and cross have been worked out.
Murishima Elasticities of Substitution (MES) has also been
estimated. Since the MES elasticities indicating the percentage of
variation in the proportion of the factors due to the price variation is
one of the critical factors, it is therefore by the aid of these elasticities
that the procedure of implementing these factors has been considered.
In part of this study, scenario building and a 75% increase in the
energy price has been manipulated and its effects on the abovementioned
elasticities have been examined. The relevant production
factors in this study include: capital, labor force, and energy. The
results of the study implies that the 75% increase in the energy price
has significantly reduced the own – price elasticity of demand and the
other elasticities.

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