Chapter 5: Problem 19

Would you usually expect elasticity of demand or supply to be higher in the short run or in the long run? Why?

Short Answer

Expert verified

We would usually expect elasticity of demand and supply to be higher in the long run. This is because, in the long run, consumers have more time to find substitutes or adjust their preferences, and firms can modify their production capacities or enter/exit the market, making both demand and supply more responsive to changes in prices. The main reason behind the difference in elasticity between the short run and the long run is the ability of consumers and producers to adapt to changes in prices, which is constrained in the short run but gradually eases in the long run.

Step by step solution

Understanding Elasticity of Demand and Supply

Elasticity of demand refers to the responsiveness of quantity demanded of a good to changes in its price, while elasticity of supply refers to the responsiveness of quantity supplied of a good to changes in its price. Elasticity can vary in the short run and the long run.

Short Run Elasticity

In the short run, both demand and supply tend to be less elastic. This is because there is not much time for consumers to adjust their consumption habits and producers to change their production levels in response to changes in prices. Consumers may not have enough time to find substitutes or change their preferences, while firms might be limited by their existing production capacity and input levels.

Long Run Elasticity

In the long run, both demand and supply tend to be more elastic. Consumers have more time to find substitutes or change their preferences, making the demand more responsive to changes in prices. Meanwhile, firms can adjust their production levels by entering or exiting the market or modifying their production capacities, making the supply more responsive to changes in prices.

Expected Elasticity in Short Run vs. Long Run

Usually, we would expect both demand and supply elasticity to be higher in the long run. This is because consumers and producers have more time to react to changes in prices in the long run, leading to a greater responsiveness in both quantity demanded and quantity supplied.

Reasons behind Elasticities Differences

The main reason behind the difference in elasticity between the short run and the long run is the ability of consumers and producers to adapt to changes in prices. In the short run, there are limits to how much consumers can change their consumption and producers can modify their production levels. These constraints gradually ease in the long run, allowing both parties to adjust their behavior and thus leading to higher elasticity for both demand and supply.