Heating Commodities

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Recommended: Cross-price elasticity of demand

Heating Commodities

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 consu...

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