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Assume there is an increase in the price of electricity (which is the result of a decrease in the supply of electricity), and electricity and natural gas are substitutes

Marketing Jan 11, 2021

Assume there is an increase in the price of electricity (which is the result of a decrease in the supply of electricity), and electricity and natural gas are substitutes. How would this affect the demand for natural gas, and what would happen to the equilibrium price and quantity of natural gas?

Expert Solution

Initially, when the supply of electricity decreases, the shift in the supply curve will cause the equilibrium point to raise, increasing the equilibrium price and decreasing the equilibrium quantity.

But because natural gas is a substitute for electricity, the consumers will respond to the increase in the price of electricity and shift towards the consumption of natural gas. As a result, the demand for natural gas will increase, which will raise the equilibrium price of natural gas as well as increase the equilibrium quantity in the market for natural gas.

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