Question

Explain how a long-run supply curve of natural gas could be derived.

Answer 1

The natural gas quantity on earth is limited, and hence, theoretically, the long run supply of natural gas should be vertical. But, in practice, the natural gas has to be costs such as exploration, drilling and other research/seeking costs. Since natural gas has to be drilled, producers would seek less (and hence supply less) of it for lower price, and seek more (supply more) of it for higher price. But, the theory persists in the sense that the product is still limited on earth. Hence, the long run supply curve would be as below.

The vertical length of dotted black lines are prices. The initial supply would require price more than zero, since there is drilling and other costs involved. To provide q2, there is more costs involved and higher price is needed, and at q3, higher price than before is needed as incentive for producers. Now, as the amount of the product is limited, and q3 is more than half of the total amount, after q3, such as to provide q4, the exploration costs is higher since less natural gas is left, and to provide q4, a much higher price would be required, and so on (the price increases drastically afterwards). At q5, which is the total quantity of natural gas on earth, the price is theoretically infinite. As can be noted, the supply curve is asymptotic to x=q5.

Note : the curve for above graph used is , where q5=8, so that it would be asymptotic to x=8.