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
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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