The time period really affects how much demand and supply change when prices go up or down. This happens because of how consumers and producers respond over time.
Elasticity of Demand:
Short Run: When we look at the short term, demand for important items usually doesn’t change much. For example, even if the price goes up, people will still buy necessities like food or medicine. This is called inelastic demand, and it has a price elasticity of about -0.4.
Long Run: However, in the long term, people start to find other choices. This means that demand becomes more elastic, or flexible. The price elasticity can go up to about -2.0, meaning people are more willing to switch to alternatives if prices change a lot.
Elasticity of Supply:
Short Run: In the short term, supply usually doesn’t change much either. This is because companies can't easily adjust how much they make. The price elasticity is around 0.5, showing that it’s not very responsive to price changes.
Long Run: Over time, companies can change their production levels more easily. This makes supply more elastic. In the long run, the price elasticity can reach about 1.5, which means companies can respond better to price changes.
Knowing how these changes happen over time is important. It helps us guess how the market will react when prices go up or down.
The time period really affects how much demand and supply change when prices go up or down. This happens because of how consumers and producers respond over time.
Elasticity of Demand:
Short Run: When we look at the short term, demand for important items usually doesn’t change much. For example, even if the price goes up, people will still buy necessities like food or medicine. This is called inelastic demand, and it has a price elasticity of about -0.4.
Long Run: However, in the long term, people start to find other choices. This means that demand becomes more elastic, or flexible. The price elasticity can go up to about -2.0, meaning people are more willing to switch to alternatives if prices change a lot.
Elasticity of Supply:
Short Run: In the short term, supply usually doesn’t change much either. This is because companies can't easily adjust how much they make. The price elasticity is around 0.5, showing that it’s not very responsive to price changes.
Long Run: Over time, companies can change their production levels more easily. This makes supply more elastic. In the long run, the price elasticity can reach about 1.5, which means companies can respond better to price changes.
Knowing how these changes happen over time is important. It helps us guess how the market will react when prices go up or down.