Econometric Studies, Essay Example

Econometric studies indicate that the short run elasticity of gasoline is about -0.15 (less than a year) whereas the long run elasticity is about -0.2 (longer than a year). Clearly both are inelastic, yet there is a price response. Why are the short run and long run elasticities different?

Price inelasticity is decided upon when a particular change in pricing does not affect so much of the market demand on a particular product. During a short run demand, the market tends to retain their interest in the same product especially when it comes to measuring how long the price change is going to retain. Relatively, this means that as long as the market knows that the price is going back to its original range, they stay in consideration with the idea of buying the same product. However, when it comes to realizing that the price would remain high, that’s the time when the market would opt to find alternatives. In this case, gas has an inelastic pricing system and yet it does create massive effect in the markets’ decision on what products to prefer and what not to. Literally, once better alternatives are opened up for consumption then perhaps the market would have the chance to put their attention on such other products.

Meanwhile long run demand elasticity imposes that the actors in the market choose to enter and exit in the industry based on other alternatives. For instance, if gas prices remain at a high level, it could be that the automotive industry would push forward towards creating automobiles that use alternative energy sources. This way, the long run demand elasticity procures a condition of completely replenishing and redesigning a new course of industry.

Response to Peer Comment:

The different between the short run and the long run is the flexibility individuals have. In the case of oil, the short run, for both supply and demand, are typically inelastic. The book explains that the supple is elastic because the amount of known oil reserves and capacity for oil extraction can’t be changed quickly. The demand in the short run is inelastic because consumer’s habits do not respond quickly to these changes. Moreover, the book explains that in the long run, supply and demand for oil tend to be elastic. Producers are able to respond to high prices by increasing oil exploration, in the long run. Consumers react with more conservation, such as replacing old cars with new efficient ones. This fact relates to the article read last week about oil companies. In the short run, there is not much that automobile companies and individuals can do to fight the rising gas prices. However, in the long run, automobile companies can look into more efficient means of transportation and consumers can look into purchasing those alternatives.

Miss Leach specifically provided a good example on how the short and long run demand elasticity differ from each other. I would have to agree that as of now, the current economy of the world [depending on the controlled available supply of gas] follows the principles of shirt run demand. The market cannot react as much to the manner by which the gas prices change through time. Two factors actually impact this decision, one is the lack of alternatives to gas products, another is that of the fact that there are expensive alternatives to automobiles that offer options of utilizing other sources of energy, something that the market is not yet ready to accept as a considerable personal option.

Preferably, the market of course settles on what is most convenient for them and their budget at the time. With a few individuals having the capacity to invest in electric cars and other alternative transport options, the gas demand would be retained in its status of being inelastic. As of now, I am curious as to how might the future of the market become if new alternatives to gas products have already been introduced? Would it greatly affect the market perception over gas products and what other industries would be affected by this particular shift?