Electricity Prices and Increased Production

Ah, a textbook example of the economics of production in the news.  I'll have to remember this example this fall when I teach Principles of Micro.  From Yahoo:

With the nation's demand for electricity soaring, the cost of staying cool this summer is on the rise.

When the demand for a product increases, all else equal its price increases.  Taking this signal, businesses respond by increasing output.  Why didn't they produce more output at the lower price?  Because the resources they would have had to use cost too much to warrant their use at the lower price.

In a normal summer, electric bills rise as individuals use more air conditioning. But this summer has been so hot that to meet the soaring demand, many utilities have had to turn to more expensive power plants, known as "peak generating plants." Instead of relying on coal or nuclear fuel, many of these power producers use more expensive oil or natural gas to power their turbines.

"Usually, they are the last to run," says George Lewis, a spokesman for PPL in Allentown, Pa., which has turned on its peaking units.

Rising prices signal producers that consumers' valuation for certain goods have risen.  The higher prices provide an incentive to businesses to use the requisite resources to produce the good.  That's exactly what is happening in the electricity market.