Question

PLEASE EXPLAIN AS MUCH AS YOU CAN AND PROVIDE EXAMPLES TO ALL PARTS OF THE QUESTION (THANK YOU!!!)

Are elasticities likely to be larger or smaller (in absolute value) in the short relative to long run? How does this relate to the J-Curve effect?

Answer 1

The elasticities are likely to be smaller in the short-run relative to the long-run. In other words, demand tends to be inelastic in the short-run than in the long-run. This is because demand does not change much immediately in response to change in price as consumers need some time to adjust their demand in response to the changing price. For example, if the price of milk goes up sharply, the demand will fall much lower in the short-run than in the long-run. People need some time to adjust their lifestyle or look for substitute goods. So, demand is more elastic in the long-run.

This is related to the concept of J-curve. J-curve refers to the phenomenon that the trade balance of a country worsens initially after depreciation or devaluation of the currency of the country and then gradually recovers in the long-run. Imports need some more time to adjust even when imports have become costlier. This happens because demand is more inelastic in the short-run.