SHORT-RUN & LONG-RUN PRICE ELASTICTY OF DEMAND

 

Learning Contents:                                                            

·         Short- Run and Long-Run Elasticity of Demand

·         Short- Run and Long-Run Demand Curves

Introduction:

Elasticity represents how and to what extent demand for a commodity responds to change in its price. Demand for some goods is elastic i.e. very responsive to price change. On the other hand, Demand for some goods is inelastic i.e. less responsive to price change. The elasticity of demand varies according to the time horizon. More time is given to adjust, more responsive will be the demand. On the other hand, less time is given to adjust, less responsiveness will be the demand. This post will explain how demand responds to price change in the short term period and the long term period.

Short- Run Elasticity of Demand

Demand tends to be less elastic in a short period signifies that price change has the very least impact on the demand for a commodity because consumers don’t obtain enough time to search for the product substitutes. They also don’t prefer to change their habits for a short period of time. As a result, their consumption behavior or habits continue to remain unchanged.  For example- In the short run, if the price of fuel increases, a consumer cannot make substantial changes in the consumption of fuel or he cannot overall cut his fuel consumption. Alternatively, he can choose public transport, carpool options, cutting out the weekend outings, or avoiding unnecessary travel.  In simple words, if the price change is temporary, then the effect of price on demand will be very small.

Long- Run Elasticity of Demand

Demand tends to be more elastic in the long period as consumers obtain enough time to become aware and search for product substitutes. As a result, they also change their shopping habits and purchase better products. Continuing the above example, In the long run, if the price of fuel (petrol) increases, a consumer will be encouraged to purchase fuel-efficient vehicles, search for a job near to home. Therefore, the Elasticity of demand is high for a long period of time.

Short- Run and Long-Run Demand Curves

a. Fuel Price in Short-Run and Long-Run

In the short run, an increase in the price of fuel will have a small effect on the demand for fuel as vehicle owners may drive less, but they will not change their cars overnight due to increased fuel prices. In the long run, the effect of price rise of fuel will have a major effect on the demand for fuel, because they will shift to fuel-efficient cars. Demand, therefore, is more elastic in the long run than in the short run.

















b. Automobiles Price in Short-Run and Long-Run

The opposite applies in the case of automobiles, In the short run, when the price of automobiles increases, the demand may fall sharply as consumers will delay their current purchase and will wait till the price decreases. If the price falls, consumer’s demand for automobiles will rise sharply. Therefore, demand for automobiles is more responsive in the short- run. In the Long-Run,  Price will have very little impact on the demand for automobiles as consumers usually replace their old cars with new ones, look for better options; therefore demand may increase but not quickly. Demand, therefore, is less elastic in the long run than in the short run.
















Let’s try some questions

Choose the Correct Answer

1. The price elasticity of demand generally tends to be?

a. Smaller in the long run than in the short run. 

b. Smaller in the short run than in the long run.

c. larger in the short run than in the long run.

d. unrelated to the length of time.

2. A long-run demand curve, as compared to a short-run demand curve for the same commodity, is generally

a. more elastic

b. less elastic

c. perfectly inelastic

d. None of above

3. The price elasticity of demand will increase with the length of the period because:

a. Consumers' incomes will increase.

b. The demand curve will shift outward

c. All prices will increase over time

d. Consumers will be better able to find substitutes.

4. Which of the following statements is true?

a. The short-run demand curve is more elastic in the case of automobiles.

b. The long-run demand curve is more elastic in the case of automobiles.

c. Short-run and long-run demand curves have the same elasticity.

d. None of the above.

5. Suppose that the short-run price elasticity of demand for electricity is 0.03 and the long run price elasticity of demand is 1.2. One would classify the short run elasticity as being ___________ and the long run elasticity as being _____________.

a. elastic; elastic

b. inelastic; elastic

c. inelastic; inelastic

d. None of the above. 

Answer Key

 

1.b

2.a

3.d

4. a

5.b

 


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