Microeconomics Question from Walter E. Williams:Edit
"Demand curves tend to be more elastic in the long run than in the short run. Explain."
- In the short-run more things are fixed (inelastic). For example, if I drive a car, in the short-run I will have to keep filling the tank with gas in order to get to work, school, or whatever the case may be. In the long-run however I can either get a more efficient car or sell the car and live and work on campus. The relevant demand here would be for gasoline. Imagine that I notice the price is going up, I will move along a short-run demand curve to a slightly reduced demand (maybe I drive to the grocery store less often and buy more at one time). This is a movement along a steeper demand curve (higher prices have relatively less effect on demand). In the long-run however I am on a flater demand curve, the long-run demand curve. My quantity changes much more over time as I adapt to the new realities of prices. To put it in more technical terms, I substitute into other goods more. This is where the increased elasticity comes from.
- Another possible example. Assume I am a beer drinker. If the price of beer goes up I start to complain, but do not alter my habits much. If the price of beer stays up for an extended amount of time I am more likely to try other goods which have remained at the same price, for example I may have a whiskey drink instead. There are other means to the ends desired by my beer drinking, and more of those will be pursued when price changes persist.
- Falling price example: housing. As the price of housing falls there is no immediate change in my behavior, I don't rush out and buy a new house. But as adjustments could be made and the lower prices persist I may notice that renting is relatively more expensive (assuming it stays constant and is projected to remain constant) and that it is time to buy a house.
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