Open ackermanmoriii opened 2 months ago
Let’s walk through a simple numerical example to illustrate short-run versus long-run elasticity using the same gasoline example.
Now, the price increases to $4 per gallon. How do people respond in the short run versus the long run?
In the short run, people can’t change their habits quickly (they still need to drive the same amount).
Elasticity formula:
[ \text{Elasticity} = \frac{\%\ \text{change in quantity demanded}}{\%\ \text{change in price}} ]
Step 1: Calculate the percentage change in price
[ \%\ \text{change in price} = \frac{4 - 2}{2} \times 100 = 100\% ]
Step 2: Calculate the percentage change in quantity demanded
[ \%\ \text{change in quantity demanded} = \frac{900 - 1000}{1000} \times 100 = -10\% ]
Step 3: Calculate short-run elasticity [ \text{Short-run elasticity} = \frac{-10\%}{100\%} = -0.1 ]
This tells us that in the short run, gasoline is inelastic (-0.1), meaning demand doesn’t change much when the price increases.
In the long run, people have time to adjust to higher prices. Over time, they start buying more fuel-efficient cars, using public transport, or moving closer to work.
Step 1: Percentage change in price remains the same as before: 100% (from $2 to $4).
Step 2: Calculate the percentage change in quantity demanded
[ \%\ \text{change in quantity demanded} = \frac{700 - 1000}{1000} \times 100 = -30\% ]
Step 3: Calculate long-run elasticity [ \text{Long-run elasticity} = \frac{-30\%}{100\%} = -0.3 ]
In the long run, gasoline is more elastic (-0.3) because people have had time to make adjustments, and demand decreases more when the price increases.
This shows how people’s ability to adjust over time changes the elasticity of demand!