A demand and supply example

Tim might need this as he attempts to relearn micro principles, from the WSJ Energy Roundup:

Amid an abundance of natural-gas supplies and soft prices, gas producers are starting to pull the plug. Chesapeake Energy Corp. said it will cut 6% of its gas production in September in response to low natural-gas prices.

Here is the basic demand and supply analysis:

1. Demand falls which creates a surplus ("an abundance of natural-gas supplies") at the old price
2. The surplus persists so the price falls ("soft prices") and quantity supplied falls ("cut 6% of its gas production")
3. As the price falls, quantity demanded rises until quantity demanded equals quantity supplied at the a new low equilibrium price ("low natural-gas prices").

Comments

[John Whitehead]

Does anyone know the percentage change in natural gas prices? If so, we have an estimate of supply elasticity.

[jim casey]

I wonder if Tim will talk about externalities or if he will just ignore them because we don't have a policy to make us pay to internalize them (SARC)

[steve]

NG is about $5.75. During the period Feb-July '07 price was pretty stable at about $7.50. Between '04 and '06, prices were all over the place with a high of $15-16 and low of about $3.50