In July 2008, average
prices for household energy were 18% higher than in July 2007. Fuel oil and
other fuels prices were up 61%, while natural gas and electricity prices were
up 18%, according to the U.S. Bureau of Labor Statistics. How is the short-run
price elasticity of demand likely to differ from the long-run price elasticity
of demand for household energy products?
Your Answer:
For most products, long-run
demand is more elastic than short-run demand, and the demand for household
energy products is no different.
For the winter of 2008, many consumers will
pay higher prices for fuel oil, but will likely consume a slightly lower
quantity: Demand will be inelastic in the short run.
As time passes, however,
many households will install more energy efficient windows and insulation to
minimize heat loss in the winter. Some households will switch to using electric
space heaters or electric heating systems as electricity prices rise more
slowly than home heating oil prices. Some householders will move to smaller
homes to reduce home heating needs over time as well.
In the long run, the
percentage change in quantity of home energy demanded in response to price will
be much larger: Demand will become much more price elastic.
Source: Pindyck /
Rubinfeld, Microeconomics, 7th edition, Pearson
