Heat rises, and so can its costs

Supply and demand.

It seems like a pretty simple concept. It's a topic usually introduced in the first or second chapter of any Economics 101 textbook; although I'd imagine that anyone would recognize it, as its function - demand up, supply down, prices up - occurs constantly in our daily lives.

I had an online discussion on a message board last week pertaining to gas prices. One poster, who I’ll call 'Jane', added a post in which she said:

Yep. And the price of natural gas has gone through the roof as well in the last two months. Why? BECAUSE THEY CAN GET AWAY WITH IT!

Given that we, here in Michigan, are part of an unusually cold January that's hit most of the population centers in the Midwest and Northeast, it’s no wonder that demand is abnormally high, and supply has been tightened. As (un)luck would have it, we had an unusually cold winter last year as well. So supply was already weak from the aftermath of last winter's continuing frigid saga.

But even these explanations were of no satisfaction to Jane, someone who I know sits somewhat left-of-center ideologically. She merely went on to accuse the natural gas company of charging a markup as they passed along the cost to the customer. To 'Janes', markups are a bad thing, of course.

It seems that those who favor big government either don't understand the dynamics of supply and demand, or refuse to believe it exists. I recall noticing similar debates during the summer electrical blackout, when a number of people would call for a state-backed lynch mob if a gas station – mindful of supply and customers' hogging of quantities – dared raise their prices above a certain point.

Why arificially keep heating costs low? Why encourage some people to blast the heat at 75 degrees and walk around their house in t-shirts, gobbling up what little supply there was already? By raising natural gas costs, people will learn to conserve and do more with less. For example, cut the thermostat down a few degrees, make sure closet and attic doors are shut, throw another blanket on the bed, etc. High prices force consumer conservation, leaving a little more "heat" for everyone.

However, individuals like Jane merely believe that when prices of a product rise sharply, the only reason is because "they can get away with it", said in such a way to imply that its immorality is beyond comprehension. It stems from a deep-rooted distrust of those who 'profiteer'. Among those who look onto the free market with disdain, it's usually surmised that those who tend to earn more than others achieved such earnings by luck, inheritance, or 'exploitation'. Hard work and business sense is usually mocked, and economic principles of supply and demand are conveniently ignored.

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In a sense, though, Jane is

In a sense, though, Jane is right, although she probably doesn't know it. Firms do in fact raise prices if they can get away with it - if they didn't, their competitors would. But the problem with using this as an explanation - or in Jane's case, the only explanation - is that it doesn't explain much of anything at all. If firms raise prices when they can get away with it, why did they raise prices now and not earlier? What were they waiting for? Did they simply have a change of heart for the worse? This is where supply and demand come in - if demand increases and supply decreases, a firm has the opportunity to raise prices. If it doesn't, the result is a short-term shortage and a long-term lack of signalling necessary for reallocating fixed costs to more optimal uses. One suspects that many Soviets failed to grasp this elementary economic concept while waiting in long lines for products that ran out hours earlier.

It seems that those who favor big government either don't understand the dynamics of supply and demand, or refuse to believe it exists.

Or, as a funnier man than I once said, "[A]re libertarians Republicans who smoke pot, drive fast, and have kinky sex, or Democrats who took Econ 101 in college?"

Hey, don't talk about Janes

Hey, don't talk about Janes that way. I totally understand supply and demand, and it's cold in Toronto too!

:-)

I don't think Jane accepts

I don't think Jane accepts the premise that consumers compete with one another and not with the natural gas companies.

MIcha, "... Firms do in fact

MIcha,

"... Firms do in fact raise prices if they can get away with it - if they didn't, their competitors would. ..."

Although this sounds nice, it doesn't work this way. It is not that the competition would itself raise prices, but that consumers will respond to higher prices in such a way that the supplier will shoot himself in the foot by raising prices in a region of the price/demand curve faced by the supplier in which the price elasticity of demand is greater than one. This means that the unit demand will fall by a larger percentage than the price rises resulting in lower total revenues. There is always a price high enough to eliminate all demand and all revenue.

When someone says that a supplier is charging what the market will bear, this is not a real criticism, but just an indication that the supplier is attempting to respond to what consumers effectively say they want by the intensity with which they refrain from buying at higher prices.

Regards, Don

"However, indivduals like

"However, indivduals like Jane merely believe that when prices of a product rise sharply, the only reason is because "they can get away with it", said in such a way to imply that its immorality is beyond comprehension. It stems from a deep-rooted distrust of those who 'profiteer'. Among those who look onto the free market with disdain, it's usually surmised that those who tend to earn more than others achieved such earnings by luck, inheritance, or 'exploitation'. Hard work and business sense is usually mocked, and economic principles of supply and demand are conveniently ignored."

I would add to that that the "Janes" also "merely believe" that cheap gas prices are part and parcel of their "right" to life, liberty and pursuit of happiness on someone elses nickel.

Also, the impact of the

Also, the impact of the decreased value of the dollar on imported LNG has an effect which she is failing to take into account.

It's funnier still that the

It's funnier still that the Janes of the world are under the impression they have the divinity to hazard to say what size car we ought own and operate, being ever mindful of the consequences of petrol consumption... even as, if this Jane is any indication, prices ought not be used to keep such consumption under "control".

Funny, I have a "Jane" on my message boards stomping ground as well.

I don't think Jane accepts

I don't think Jane accepts the premise that consumers compete with one another and not with the natural gas companies.

I like that.

Also, when prices go down because of an abundance of supplies, consumers pay less BECAUSE THEY CAN GET AWAY WITH IT.

They NEVER offer to pay more when there's a glut.