Short- vs Long-Term Elasticities

Demand Elasticity in the Short and Long Term

For most goods and services, the price elasticity of demand is greater in the long term compared to the short term. The difference depends on how long it takes consumers to adapt. It takes time for consumers to change their consumption habits. For instance, when gasoline prices rise, consumers reduce their consumption only slightly in the short term. However, in the long term, they may purchase smaller or more fuel-efficient vehicles, or even an electric car.

In the graph, the blue line (SR) represents a short-term demand curve, while the green line (LR) represents a long-term demand curve. Notice that in the short-term curve, when the price changes, the change in the quantity demanded is smaller compared to what happens in the long-term curve, which is much more elastic, resulting in a significantly larger change in quantity demanded in response to price changes.

Demand Elasticity in the Short and Long Term for Durable Goods

For durable goods or goods for which consumers hold a large stock, the opposite occurs: the price elasticity of demand is greater in the short term compared to the long term. This happens because, in the short term, a price increase leads consumers to postpone their purchase. For example, if you were planning to buy a new refrigerator but the price increases, it is likely that you will delay the purchase. The same applies to vehicles. However, in the long term, the existing stock depreciates—old refrigerators break down, and cars must be scrapped—forcing consumers to purchase new ones, thereby reducing their sensitivity to price changes and resulting in lower elasticity.

The graph shows how short-term demand (SR) for durable goods responds more significantly to price changes compared to the long-term demand curve (LR).

Supply Elasticity in the Short and Long Term

For most goods and services, the price elasticity of supply is much higher in the long term compared to the short term. The main reason is that in the short term, firms face constraints in adjusting their production capacity. It takes time to build new factories, open new offices, or shut down existing ones. Therefore, in the short term, firms' ability to respond is limited to using their existing resources, such as paying overtime to employees and keeping factories and offices open for longer hours. However, they always have greater adaptability in the long term.

In the graph, the green line (SR) represents short-term supply, while the blue line (LR) represents long-term supply. Notice how, in the short term, a price increase leads to a smaller increase in the quantity supplied compared to the same price change in the long-term supply curve. This occurs because, in the short term, a significant price increase is required to provide firms with enough incentive to quickly boost production. In the long term, however, greater adaptability means that a high price increase is not necessary to expand the quantity supplied.

Income Elasticity of Demand in the Short and Long Term

The income elasticity of demand also differs between the short and long term. For most goods and services, such as food, income elasticity is higher in the long term compared to the short term. When income increases, people tend to consume more, but adapting their new consumption habits based on their new income level takes time.

For durable goods, the opposite is true—they tend to have higher income elasticities of demand in the short term compared to the long term. When a person experiences an income increase above their previous level, they often purchase new durable goods, such as a new car or household appliances. However, once the consumer already owns these goods, they do not replace them frequently. As a result, the income elasticity of demand is higher in the short term than in the long term.