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.







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