Analysis Paper 1 The EIA predicted Midwestern Illinois families to be spending as much as 40% more on heating this year compared to last year because of higher natural gas prices. The increase in price is largely due to the reduction of natural gas supplied. In the short run, supply and demand for natural gas is relatively inelastic. The supply is inelastic because the quantity of known natural gas reserves and the capacity for natural gas extraction can not be changed in a short amount of time.
Demand is inelastic because the buying habits of natural gas do not change dramatically due to price increase or decrease. In the colder winter months, people need heat. The need for warmth does not just stop one day in the winter. Since the quantity demanded for natural gas is greater then the quantity supplied; there is a shortage (Ex.
1). Sellers have responded to this shortage by raising their prices without losing their sales. If by some chance the sellers had more quantity supplied then they had quantity demanded, there would be a surplus (Ex. 2). The sellers would most likely want to sell the extra gas. To do so, the price of the natural gas must be cut.
The prices would continue to fall until the market reached the equilibrium. The opposite is true however, in the long run compared to the short run. The producers of gas are responding to high prices by causing an increase in natural gas exploration. They do this by finding more sites to extract natural gas, and by using more money to operate rigs. The consumers respond with greater conservation of heat. For example, families may decide to lower the temperature in the house, and not keep the heater running for the entire day.
Families may also decide to use the fireplace more, or even buy more blankets instead of using the heater. The high price of gas will only be in the short run. When the natural gas companies decided to reduce their productio of natural gas, they shifted the supply curve to the left (Ex. 3).
The less gas that is sold, the higher the price. In the long run, when supply and demand are more elastic, the same reduction in supply, measured by the horizontal shift in the supply curve, causes a smaller increase in the price (Ex. 4).