Demand and Supply of British Gas - Essay Example

The law of demand and supply simply states that if there is a high supply of a commodity and a low demand, then the price levels will go down but if there is a low supply and a high demand for a commodity, then the price levels will be high.
If the price of gas increases, the quantity of demand will still be stable because many people using the gas are loyal customers and are less likely to change dealers. The quantity of demand may also go down but it will be negligible.
An increase in gas price, on the other hand, will lead to an increase in the quantity of supply from the supplier. This is because the supplier wants to make more profits.
Also, if the price of gas decreases, the quantity of demand will increase because it is likely to be wasted. The increase though will be negligible.
A decrease in price will also lead to a decrease in supply because the supplier does not want to go at a loss.
If the prices go up, the consumers will either change the supplier or get cheaper deals or they might substitute and use alternative sources of energy like electricity.
The producer is likely to increase the supply of gas so as to maximize profits. They may also use cheaper gas packages to lure new customers.
If the prices go down, then the consumers are likely to maintain their supplier and are likely to use more gas because it will be affordable.
The producer on the other hand is likely to reduce the supply of the gas so as to minimize losses.
There will be a substitution effect if the prices of gas go up. Consumers are more likely to turn to other energy sources like electricity or solar.
There will also be a complementary effect in case the gas prices go up so as to minimize costs on the part of the consumer.
The effect of price increases in gas will lead to high costs in the hospitality industry and manufacturing industry because of the high production cost.

ELASTICITY
Gas is an inelastic good. This is because the demand is unaffected whether the price goes up or down. This is illustrated by the fact that consumers could have saved £ 234 if they changed suppliers but that did not bother them.
If there is an increase in price, then there will be an increase in the firm’s revenue. This is because they will retain their customers despite prices going up
On the other hand, if prices go down, there will be a decrease in revenue because they will still maintain the same customers but will be charging lower prices.
If the energy market is attractive to suppliers, the supply of gas will reduce. This is because people, low-income earners, will turn to alternative sources of energy especially if they are cheaper.
The inelasticity is likely to change in the future. This will happen if people are made aware of changes in gas prices by CMA and the introduction of alternative sources of energy.
In case of a cost-related price increase, the firm will bear the cost because it will be an operational expense.

COMPETITION
The rivals in the UK energy market are SSE, Scottish Power, British Gas owner Centrica, n-power, E.on, and EDF.
This market is an oligopoly because of the small number of sellers and these sellers are aware of each other’s actions and one firm’s decision influences other firms, decisions.
The degree of competition is very high and this is because of the high gas prices that are being charged by most of the companies to sustain them.
This kind of market structure can lead to collisions where firms merge so as to benefit from each other and gain market share.
This might lead to control of prices by the company and not the government.
If the government wants to create a more competitive market for gas, it can resort to breaking up the bigger companies so as to lead to the creation of more companies for the better competition which will benefit the consumer.
If the government is successful in breaking up the companies, there will be cheaper supplies, and demand will be high, especially from cheaper suppliers.
The government's actions would lead to a decrease in price from the supplier.

GOVERNMENT INTERVENTION
The government can intervene by establishing fair prices that will work for everyone.
The government can also break up the big suppliers so as to encourage competition.
If the government intervenes by establishing fair prices that will work for everyone, then the producers will not control the gas prices anymore. This will lead to better and more affordable services.

This action will affect prices in that the consumer will pay less than they used to and the supplier will also get less revenue.

If the government decides to break up the big suppliers, the producer will have to be more aggressive in acquiring consumers and they will charge lower prices for gas.

A carbon tax is likely to be paid for gas taxes.

This kind of tax is regressive in that low-income earners may be charged inappropriately either directly or indirectly. Read More