Question

Suppose the price elasticity of demand for heating oil is 0.1 in the short run and 0.9 in the long run.

If the price of heating oil rises from $1.90 to $2.10 per gallon, the quantity of heating oil demanded will (fall, rise???) by ???% in the short run and by ???% in the long run.

The change is (smaller, larger???) in the long run because people can respond (more, less???) easily to the change in the price of heating oil.

Answer 1

The price elasticity of demand is the ratio of percentage change in the quantity demanded of a product to the percentage change in its price.

This is given by Ed = %∆Qd/%∆P.

The price of heating oil has increased from 1.90 to 2.10 per gallon, which is an increase of of 0.20 per gallon or 0.20*100/1.90 = 10.526%

In the short run, the price elasticity of demand is -0.1 therefore we have -0.1 = %∆Qd / 10.526% or %∆Qd = -1.0526 %. This shows that the quantity of heating oil demanded will fall by 1.05 percent in the short run.

Similarly in the long run the quantity of heating oil demand will fall by 0.9*10.526 = 9.47 percent in the long run

the change is larger in the long run because people can respond more easily to any change in the price.