Comments on: Prices as signals from buyers to sellers - a case study

By: Alex Han

Alex Han — Thu, 30 Oct 2008 21:35:14 +0000

First of all, Rocio I think you meant to say that the initial price is ABOVE the equilibrium price.
I agree with Rocio when she says that lowering price is unaffordable and that reducing supply is also not the best means of reaching an equilibrium. Now, those are two solutions, but there is another which is increasing the demand. It is obvious that people will not easily demand more. Therefore this is ultimately when the government kicks in and does something helpful for once by buying that surplus. SO NOW WE’VE REACHED EQUILIBRIUM. But where does the government get that money? TAX. Which means that the consumers are paying more and consumer surplus is decreasing. Nevertheless it keeps the natural gas industry going plus that surplus stored can be used for future usage in the case of a SHORTAGE because natural gas is a non-perishable product. So we’ve just talked about three potential ways of reaching equilibrium. In my opinion the government intervention solution is the most effective despite of its negative consequences…. Anyone agree or disagree?

By: Rocio Perez

Rocio Perez — Fri, 17 Oct 2008 12:16:30 +0000

Like Benji and Basti already mentioned, the gas companies’ reaction to soft prices is to lower their output or quantity supplied. This shows a direct relationship between price and quantity of output supplied and clearly illustrates the Law of Supply.
If I were to sketch this on a supply/demand diagram, the point that natural gas companies are right now is below the equilibrium point (illustrating a surplus of gas). The point has had to shift closer to the demand curve (by lowering the prices) to comply with customer’s demands and rid themselves of the surplus. However, with prices so low, they will only lose money and not make any worthy profits. The natural gas market would unfortunately suffer if firms reduce their capital spending in the next two years causing them to allocate their production towards something else that will not cause them to lose money. Therefore, resources are being under-allocated towards natural-gas at the moment since the quantity supply has been reduced.

By: Bastien Vogt

Bastien Vogt — Fri, 03 Oct 2008 10:22:03 +0000

There is obviously a surplus in natural gas. I agree with Benji that the demand for natural gas has decreased because of the the surplus. The only way to solve this problem was for the supply and demand to be at the same point. For this their companies had to sell cheap natural gas to get rid of the surplus. The negative effect that this surplus will have on natural gas in the next few months is that the supply will decrease because natural gas is being sold for so cheap. In the next two years companies may move towards different means of demand, and supplying other resources. This may lead to a end in the supply of natural gas because the price is so low and production is to costly.

By: Benji Rosen

Benji Rosen — Wed, 01 Oct 2008 13:28:09 +0000

According to the quote, there is a surplus of natural gas and low (soft) prices leaving the companies in a situation where they are not maximizing their profit. The way the gas prices sofened assuming gas prices sayed the same, was because of high supply and not as much demand. In an attempt to sell their product, and reach an equilibrium companies then had to lower the prices to match the poinit on the demand curve where the quantity demanded is equal to the quantity supplied. The effect of companies lowering their prices though is that they will now lower their supply substantially, and we will see less natural gass being produced as prices stay low. The companies see it fit to invest in capitol for other areas since they become more profitable. What as a result will occour is natural gas production, as an industry, slow down in growth, and maybe even go into recession as the scarce resources are allocated into creating more supply in other areas.