Heating Commodities Essay, Research Paper

Heating Commodities

Jennifer Loughery 082970

Introductory to Micro-Economics 1011-107

Dr. Pryor

November 25, 1996.

Back in the middle of October, the price of natural-gas had risen

because a gas company was forced to shut down a pipeline due to the need for

repairs. This impending shortage led to the decrease in prices for other

heating commodities, as well as larger profits. The demand for energy was

becoming greater and greater because it was that time of year when consumers

began 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 true

because the cross elasticity of demand states that as the percentage change in

the quantity demanded of one commodity results from a one percent change in the

price of another commodity. In other words, the increase in demand for crude

oil, gasoline, and heating oil was the outcome of the price increase in natural

gas.

As shown in the graph below, the cross elasticity of demand is direct

(positive). As the price of natural increases, the quantity demanded for the

three other energy commodities increase.

The market system today functions on price. Consumers make their

decision 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 with

natural-gas’s substitutes (crude oil, heating oil, or gasoline) rather than the

natural-gas, the higher priced commodity. The commodity, energy, is something

that 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 an

increase in price.

As shown in the graph below, as the supply decreases, the price

increases. This means that the price is inelastic. This is true because as the

price of the commodity is increased, the total amount spent on the commodity

will increase also.

The price mechanism reflects scarcity, which is stated as the greater

demand for a good, energy, (because of the desire to store it for the colder

months ahead) with the same supply of that good becoming scarce resulting in a

higher price.

Consumer’s demand for energy changes with the seasons. For example, the

demand for energy in the summer is probably very low. The demand for energy in

the fall will be higher because consumers begin storing it for the winter. And

during the winter months the demand is high, where as during the spring months

the demand decreases from the other months. This commodity is greatly

influenced 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 in

Pennsylvania do.

The market of a commodity is determined by many things, one of those

being the nature of the commodity’s prices, which is influenced by the demand of

that particular commodity. For the commodity, energy consumers can see that the

quantity demanded is very sensitive to changes in prices. And factors such as

climate and the region in which they live underlie the market demand curve for

this commodity.