Oct 30 2009

Calculating the price elasticity of supply of natural gas

12 responses so far

12 Responses to “Calculating the price elasticity of supply of natural gas”

1. # Sharon Lion 26 Sep 2007 at 11:43 pm

   Since the PES is less than 1 at 0.2, then the gas producers are relatively unresponsive to the change in gas price. (6% change in production with a 30% changein price) However, supply becomes more elastic over a longer period of time. So the PES would not remain 0.2, but rather it will increase over time if the prices were to remain low because over time, the producers would have more time to adjust plant sizes accordingly.

2. # Juliaon 06 Nov 2008 at 1:48 pm

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3. # Gabrielon 19 Nov 2008 at 12:44 am

   I have to agree with Sharon. Since the price elasticity of supply is 0.2, this means that the producers are relatively unresponsive, or inelastic, to a change in price. The PES would certainly not stay the same since the main determinant of supply is time. As time passes, producers become more elastic, since they have more time to adjust to changes in price. If the price of natural gas were to remain low, then producers would adjust by decreasing their supply. Producers would decrease supply because there is a direct relationship between price and quantity supplied. If prices went down, then the quantity supplied would also go down. In the short run, they might do this by decreasing the intensity of labour. In the long run they would shut down factories and decrease labour and capital.

4. # Noraon 31 Oct 2009 at 5:19 pm

   The price elasticity of supply is 0.26, which is less than one, hence relatively inelastic. This means that the gas producers are relatively unresponsive to a change in price. An inelastic supply curve shows that as price increases or decreases, the producers will not change their supply by much. The price decreased by 23.3% and the producer’s relative un-responsiveness caused a change in quantity supplied of only 6%.

   Over time, the PES would increase as the producers have more time to adjust their production according to the quantity demand. After a period of time, producers will become more responsive to a change in price, and the quantity supplied will change more.

   The primary determinant of PES is the time period considered. The longer the time period considered, the more elastic will be supply. In the market period, PES is very inelastic. In the short run, PES is more elastic, and in the long run the PES is much more elastic.

5. # Nicolo' Fanellion 02 Nov 2009 at 1:02 am

   The price elasticity of supply is, in this case, 0.26. Because it is smaller than one and bigger than zero, the PES for natural gas can be considered to be quite inelastic. This means that even if there is a large fall in prices, there will be a proportionally smaller fall in quantity supplied for gas.
   If prices were to remain low, over time PES will become more elastic and thus suppliers will supply a smaller amount of gas to its buyers. With more time, being the primary determinant of demand, producers will become more elastic. Thus, they will be able to employ less factors of productions in the gas industry, where such profits are not earned anymore and shift them to a more profitable one. Therefore, if the prices would remain this low, on the one hand it would be good for us, as we would not have to pay as much, but on the other, less and less of it will be supplied.

6. # Hannaon 03 Nov 2009 at 12:50 am

   Since 0.26 is less than one, it means that the price elasticity of supply is inelastic, meaning that producers are relatively unresponsive to a change in price. The price decreased by 23.3% but the producer’s change in quantity supplied was only 6%, which shows how the quantity supplied decreased by a much smaller number than the decrease in price, which, once again, shows that producers were relatively unresponsive.

   If the price of natural gas would remain low, then the PES would become more elastic over time, meaning that producers will decrease their quantity supplied so that it becomes closer to equilibrium. This is because over time, the producers are able to adjust to the decrease in price by decreasing their quantity supplied, so that they do not suffer from too much loss.

   The primary determinant of price elasticity of supply is time because over time the producers have time to adjust to the change in price. The more time that goes by, the more elastic the supply will become. In the market period, PES is very inelastic. In the short run, PES is more elastic, and in the long run the PES is much more elastic, so there is a constant increase in elasticity over time.

7. # Daniel Graberon 04 Nov 2009 at 5:05 am

   With a price elasticity of supply of 0.26, the producers will be quite unresponsive to a change in price. Therefore, the PES is highly inelastic. When the price of natural gas decreases, the quantity supplied will decrease proportionately less. If the prices were to remain low, the PES of natural gas would not remain the same. The producers cannot immediately change their factors of production. However, after a certain period of time, producers will be able to decrease their factors of production (they can reduce the number of employers or use less machinery). In this scenario, time is the primary determinant of PED. As more time passes, producers will be more responsive to a change in price. Therefore, producers will become more elastic. Consequently, after some time, the quantity supplied will decrease at a bigger rate than the price.

8. # Charlotte Spliidon 05 Nov 2009 at 3:29 am

   The producers are not very responsive to a change in price, or in other words, the PES is inelastic. So when there is a certain percent change in price, the percent change in quantity supplied is less.
   The PES would definitely not remain at 0.26. Take for example if the price was at 0, then the quantity supplied would most probably also be at 0, and so the PES is 0. The PES only measures at a specific point on the graph, not all the way through.
   A very important determinant of PES is time. If the price should suddenly rise, people won’t really respond to it, but over time they would grow accustomed to it and may now purchase less or more of this good. Another determinant is how much the cost increases or decreases when supply changes. If the cost increases by a lot, then the producers maybe wouldn’t want to increase the supply and this would make the good inelastic.

9. # kvoskuilon 05 Nov 2009 at 5:16 pm

   PES of Natural Gas
   1. The price elasticity of supply is 0.26, it is less that 1, and so it is inelastic. The calculations show that the producers are relatively unresponsive to a change in price. Since the percent change in quantity is -6% and the price change is -23.3% thus we can deduce that the producers are unresponsive to a price change.
   2. I believe that the PES of natural gas will not stay at 0.26 because producers will have had time to adjust to the change in price. The quantity demanded will increase due to a change in price so more or less will be produced.
   3. The primary determinate of supply is time. It is the time producers have to respond to a change in price. In due time, producers become more elastic because producers have had enough time to respond to a price change.

10. # Sophieon 06 Nov 2009 at 4:48 am

    The gas producers’ response to this drop in price from 7. 50 to 5.75 is very low, at 6%. This means that the percentage change in quantity supplied is less than the percentage change in price of the product they have, revealing an answer less than one (0.26), and therefore proving it an inelastic product. However, if this would remain the price for a longer period of time, the company will be forced to cut back even more on production because otherwise their losses would affect them too hard. In a situation such as this one, the company either start responding to a decrease in price, or they will go bankrupt because their revenues have decreased due to the price decreases and soon enough they will have negative profits. Therefore, after time, the product will eventually become elastic.
    The primary determinant of PES is time. The reason for this is because if there has been a change of price of a product, then the company cannot immediately respond to this change. They need time in order to adapt, think and organize themselves to a new type of market output. Therefore, if there had been a change in price of a good, as time goes by the producer becomes more and more elastic, at the beginning being highly inelastic.

11. # MTon 13 Nov 2009 at 3:22 am

    This PES calculation is too simply. It uses a point elasticity calculation but the price change movement is too big for such a small delta point calculation. You should at least use an Arc-Elasticity formula since you do not know the same of the Supply curve. MT.

12. # Jonon 18 Nov 2009 at 3:27 am

    I agree — use the Arc Elasticity formula for the most correct calculation.

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