David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

4.4 Short run and long run
simultaneously, has a negligible effect on supply. Market price is unaffected and the unlucky farmer simply
sells less output at the price that would have prevailed in any case. This illustrates an important lesson in
economics. The individual producer faces a demand that is very elastic - consumers can easily switch to
the output of similar farmers - even if the demand for the crop as a whole is very inelastic.
Easy profits
Low-cost airline pioneer Sir Stelios Haji­
Ioannou, founder of easyJet and then the
EasyGroup, credits two things with his success. The first,
which he says only half in jest, is coming from a rich
family, which made it easier to get through the early years.
The second, which he also proudly cites, is his economics
degree, where the lecture on elasticity of demand helped
underpin his conviction that low prices could generate
large revenues by creating high sales volume. A recent
estimate of the fare elasticity of demand for air travel
in Europe is -1.40, meaning that the demand is indeed
elastic.* When he launched easy Jet, conventional airlines
were happy to fill 70 per cent of their seats on an average
flight. EasyJet now runs regularly at 85 per cent capacity
on its 600 flights a day, which is a lot of extra revenue
without any additional costs.
*
IATA (2007) Estimating Air Travel Demand Elasticities: Final Report.
Source: www.easyJet.com.
Picture: © lce962 I Dreomstime.cam
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The price elasticity of demand varies according to the length of time in which
consumers can adjust their spending patterns when prices change. The most
dramatic price change of the past 50 years, the oil price rise of 1973-7 4, caught
many households with a new but fuel-inefficient car. At first, they may not have
expected the higher oil price to last. Then they may have planned to buy a smaller
car with greater fuel efficiency. But in countries like the US, few small cars were yet
available. In the short run, households were stuck. Unless they could rearrange
their lifestyles to reduce car use, they had to pay the higher petrol prices. Demand
for petrol was inelastic.
The short run is the period
after prices change but before
quantity adjustment can occur.
The long run is the period
needed for complete
adjustment to a price change.
Its length depends on the type
of adjustments consumers wish
to make.
Over the long run, consumers had time to sell their big cars and buy cars with better fuel efficiency, or to
move from the distant suburbs closer to their place of work. Over this longer period, they could reduce the
quantity of petrol demanded much more than they could initially.
The price elasticity of demand is lower in the short run than in the long run when there is more scope to
substitute other goods. This result is very general. Even if addicted smokers cannot adjust to a rise in the
price of cigarettes, fewer young people start smoking and gradually the number of smokers falls.
Table 4.6 reports estimates of the short- and long-run elasticities of demand for various goods in the UK.
Those results show that the long-run elasticity tends to be larger than the short-run one.
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