The effect of an increase in gas prices on the supply of and demand for gas and electricity, in the short and long term

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ADRIAN DANIELS                   INTRO TO ECONOMIC THEORY         STUDENT NO: 0800 5892


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The Economist (The Economist, 2008) has reported that energy prices are getting 'higher and higher'. This is especially for Electricity and Gas. Consider an effect of gas prices increasing, being that people will switch to alternative energy providers. For example, from the United Kingdom's number one Gas and Electricity provider 'British Gas', to ‘EDF’. This may only apply to people involved in the lower end of the national wealth distribution. People who form the higher end of the national wealth distribution may not even realise the change in price that has been made to the gas and electricity prices. For instance, the ‘1% of the United Kingdom’s population who own 21% of the nation’s wealth’ (Inland Revenue, 2006) .Thus they are very unlikely to react towards this change. On the other hand, people who form the lower end of the national wealth distribution (such as pensioners) will notice this increase in gas and electricity costs. Their income is significantly lower than those in the higher end of the wealth distribution, so they have to monitor their household income and budget with their spending. As a result, Families may have to switch utility companies if prices charged by 'British Gas' do not fit their household budget for instance. This is so that they can afford to cover other costs like mortgages and food. The individual's income and the price of the goods or services are determinants of an individual's demand for a good or service. Therefore the demand for gas and electricity will fall. This is illustrated below:

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                                                      Shift in demand for Gas and Electricity

Consequently, people may use substitutes to gas and electricity. They may revert to how things were done traditionally in the past, when gas and electricity was not even invented. So they may use candles and wood as substitutes. Electricity and Gas are not necessities. They are not essential for survival. The less unfortunate people residing in rural areas in 'Third World' countries have ...

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