Question

Market Behavior: Demand Elasticity - Suppose you constructed from government data two demand schedules (curves) for gasoline. One is a short run demand, and the other is long run. Which of the two demand curves should be the most elastic: the short run or long run? Explain your answer. How would the difference, if any, affect a government's long run energy policy?  

Answer 1

Answer :

Short-run gasoline is more inelastic than long-run because in the short run, we have to buy gas to keep our car going. In the long run, we can switch to more fuel-efficient cars (including hybrid), ride the bus or walk more.

The long-run and short-run elasticities of demand with respect to gasoline price and national income are empirically examined using a co-integration and error correction model (ECM). Gasoline demand is relatively elastic to price and income change in both the long run and short run, and each elasticity is higher in the long run than in the short run. Moreover, gasoline demand response to price is higher than to income. This implies that a price demand-side management policy can be quite effective in Korea. Especially, the limitation of price change is important to the stabilization of gasoline demand.