Question

“Pretty much everything is more elastic in the long run than in the short-run.”

1. Briefly explain why we generally expect that the

the decrease in quantity demanded will be larger in the

long-run than in the short run.

2. Based on this explanation, identify a product

where you expect that the short-run quantity

reaction to a price increase would not be much

different than the long-run reaction.

Answer 1

Demand tends to more price inelastic in the short run , because if price of good increases, consumer don't have enough time find other alternative good. But in long run,demand tends to be more price elastic ,because consumer becomes more aware about alternatives. If people are used to buying a good, then its price rises , but they will tend to keep buying it out of habit. However,when they realise that price rise is permanent, they will begin to search other low priced alternative goods and then demand will fall more .In long run ,if price of good is expensive for a considerable period of time , consumer will try to save money and will start to find alternatives Suppose if electricity price rises, people would keep using electricity to heat the food in short run. However, in long term , higher price of electricity may force people to gas stove or microwave. 2. Let us a take an example of inelastic good. Short run quantity reaction to price increase would not be much different than the long -run reaction. Salt is an inelastic good. The short run quantity reaction to a price of salt increase would not be much different than quantity reaction in long run. Every household would buy a considerable amount of salt in all time even the price rises or falls. Because for salt there is no close substitutes . If its price rises , consumers can't find any alternatives for salt