Jennifer price of natural increases, the quantity
Jennifer Loughery 082970Introductory to Micro-Economics 1011-107Dr. PryorNovember 25, 1996.Back in the middle of October, the price of natural-gas had risenbecause a gas company was forced to shut down a pipeline due to the need forrepairs. This impending shortage led to the decrease in prices for otherheating commodities, as well as larger profits.
The demand for energy wasbecoming greater and greater because it was that time of year when consumersbegan storing energy in their homes to prepare for the cold winter months ahead.The four commodities mentioned in this article, crude oil, heating oil,gasoline and natural gas are all substitutes for one another. This is truebecause the cross elasticity of demand states that as the percentage change inthe quantity demanded of one commodity results from a one percent change in theprice of another commodity.In other words, the increase in demand for crudeoil, gasoline, and heating oil was the outcome of the price increase in naturalgas.As shown in the graph below, the cross elasticity of demand is direct(positive). As the price of natural increases, the quantity demanded for thethree other energy commodities increase.
The market system today functions on price. Consumers make theirdecision on what to buy by the price of their desired good. Naturally,consumers will choose the lower price of a commodity they wish to purchase.This is why consumers, wanting to heat their homes, chose to heat them withnatural-gas’s substitutes (crude oil, heating oil, or gasoline) rather than thenatural-gas, the higher priced commodity. The commodity, energy, is somethingthat people can not go without during the winter months.
If their is a shortage,which means that consumers demand more than the available supply, it leads to anincrease in price.As shown in the graph below, as the supply decreases, the priceincreases. This means that the price is inelastic.
This is true because as theprice of the commodity is increased, the total amount spent on the commoditywill increase also.The price mechanism reflects scarcity, which is stated as the greaterdemand for a good, energy, (because of the desire to store it for the coldermonths ahead) with the same supply of that good becoming scarce resulting in ahigher price.Consumer’s demand for energy changes with the seasons. For example, thedemand for energy in the summer is probably very low.
The demand for energy inthe fall will be higher because consumers begin storing it for the winter. Andduring the winter months the demand is high, where as during the spring monthsthe demand decreases from the other months. This commodity is greatlyinfluenced by the climate and the type of region consumers live in. For example,people in Florida do not have the same type of energy bill as the people inPennsylvania do.The market of a commodity is determined by many things, one of thosebeing the nature of the commodity’s prices, which is influenced by the demand ofthat particular commodity.
For the commodity, energy consumers can see that thequantity demanded is very sensitive to changes in prices. And factors such asclimate and the region in which they live underlie the market demand curve forthis commodity. Category: Business