Energy markets are commodity markets that deal with the trade and supply of energy. The energy market is very vital for any economy since production of almost all products involves the use of one form of energy. In this market, theories that exist there suggest that any rise in price results to a fall in the amount of energy demanded holding other things constant. The energy market is the only market where by the consumers’ demand for energy is less sensitive to price changes then the demand for many other commodities. Most of the available forms of energy in the energy market have a low degree of substitutability more in the short run. This therefore implies that, the consumer demand for energy should be inelastic in the short run and should be elastic in the long run. This occurs because, in the short run, the consumer is weighing options on how to adopt to the increased price and in the long run, the consumer is shifting to using other appliances that are energy efficient.
In the energy market, energy severs are the preferred forms of substitutes in case of an increase in the price of energy
Price elasticity of demand is calculated by dividing the proportionate change in quantity demanded by the proportionate change in price. Proportionate changes are used so that the elasticity is a unit-less value and does not depend on the type of measures used.
PEoD = (%change in Quantity Demanded)/(%change in price)
To study this concept of price elasticity of demand in the energy market, I intend to use gasoline and electricity. In the United States, the prices for gasoline have risen steeply for the past few years. This dramatic increase in the price of gasoline has been as a result of the increase in the price of oil. There is a direct relationship between an increase in the price of oil and that of gasoline where by for every one dollar increase in the price of barrel of oil, gasoline prices rise 2.5 cents per gallon at the pump. In one study that was published in Energy Journal which had examined 101 different studies and found out that in the short-run, the average price-elasticity of demand for gasoline was -0.26. This suggests that, a 10% increase in the price of gasoline lowers the quantity demanded by 2.6%. In the long-run, the price elasticity of demand was found out to be -0.58 which suggested that, a 10% increase in gasoline price caused the quantity demanded to decline by 5.8%.
The elasticity of demand for electricity is defined as being inelastic but in the long-run, a response in the increase in price is usually observed. To find out a clear way of how price elasticity of demand is significant in the demand for electricity, I will compare elasticity of demand in electricity consumption in residential and commercial premises as it was established in a study that sort to determine how the two are affected by rise in electricity price.
|Residential Electricity||Commercial Electricity|
From the results above, it is evident that short-run elasticity for elasticity appear not to differ in both residential and commercial premises. It also indicates that, changes in the price of commercial electricity might give a bigger impact in the long-run as compared to the short-term. In the energy market, consumers tend more so to come up with adaptability measures in response to a rise in the price of the commodity in question. Therefore a 10% increase in ether gasoline or electricity will force the consumers to look for other affordable sources of energy, buy new appliances, opt to use public means of transport incase of a rise in gasoline prices.
In the example of elasticity of demand in residential and commercial premises, the variation observed in the long-run demand between the two is due to the fact that, business people will respond appropriately to increases in the price of electricity in order to reduce business losses.
Point A= $18 * 10= $180
Point B= $ 14 * 30= $ 420
Point C= $ 10 * 50= $ 500
Point D= $ 6 * 70= $ 420
Point E= $2 * 90= $ 180
(b)Price elasticity of demand.
(Change in Quantity/ Average of two Quantities)/ (Change in price/Average of two prices)
Elasticity at point B = (30-10/20*100)/($18-$14/16*100) = 100/25=4
Elasticity at point C= (50-30/40*100)/($14-$10/8*100) = 50/50
Elasticity at point D= (70-50/60*100)/($10-$6/8*100) = 33.3/50
Elasticity at point E= (90-70/80*100)/($6-$2/4*100) = 25/100