Economics – Coal & Gas?

Technological changes in coal production and increases in the price of natural gas would cause the price of coal to:
a. rise
b. fall
c. remain the same
d. either rise or fall depending on the magnitude of the changes
e. follow the movement in the price of natural gas.

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I chose d.

As I see it, the changes in coal production would increase supply, and that would increase price. However the increase of natural gas, a substitute, would increase the demand for coal, which would thereby reduce the price for coal.

Can anyone help confirm?

2 Responses to “Economics – Coal & Gas?”

  1. Steven S Says:

    re: your reasoning

    An increase in coal production would decrease the price since there is more supply with the same level of demand. Increasing the price of natural gas, assuming that natural gas and coal are substitutes, would increase the demand for coal and thus raise the price of coal. Whether the market clearing price increases or decreases as result of the two effects depends on the magnitude(as measured by elasticity functions).

  2. SmithtoMalthus Says:

    It would be D. But you reasoning is wrong. Your first statement is right, "As I see it, the changes in coal production would increase supply.." however that would decrease price because supply is positively slopped. The increase in demand increase price. So then D is right you just mix up your supply and demand curves.