Suppose the price elasticity of demand for heating oil is...

Suppose the price elasticity of demand for heating oil is 0.2 in the short run and 0.7 in the long run. a. If the price of heating oil rises from $\$ 1.80$ to $\$ 2.20$ per gallon, what happens to the quantity of heating oil demanded in the short run? In the long run? (Use the midpoint method in your calculations.) b. Why might this elasticity depend on the time horizon?

Suppose the price elasticity of demand for heating oil is 0.2 in the short run and 0.7 in the long run.
a. If the price of heating oil rises from $\$ 1.80$ to $\$ 2.20$ per gallon, what happens to the quantity of heating oil demanded in the short run? In the long run? (Use the midpoint method in your calculations.)
b. Why might this elasticity depend on the time horizon?

Key Concepts

Price Elasticity of Demand

This concept measures how sensitive the quantity demanded of a good is to a change in its price. It quantifies the percentage change in quantity demanded resulting from a percentage change in price, helping economists understand consumer behavior and market dynamics.

Midpoint Method

This approach is used to calculate elasticity by taking the average of the initial and final prices and quantities as the base for percentage changes. It helps to reduce bias that may occur from choosing different starting points, thereby providing a more accurate measure of elasticity.

Short-Run vs Long-Run Elasticity

This distinction reflects the idea that consumer responsiveness to price changes can vary over time. In the short run, consumers may not adjust their behavior significantly due to limited options or adjustment time, resulting in lower elasticity. Over the long run, however, consumers have more time to change their habits, find substitutes, or adjust consumption patterns, leading to higher elasticity.

Time Horizon in Price Elasticity

The time horizon considers how the responsiveness of demand to price changes evolves over different time periods. It highlights that immediate responses (short-run) may differ from responses once consumers have had sufficient time to adapt (long-run), thereby affecting the overall measurement of elasticity.

Transcript

00:01 Here we're going to be using the midpoint method to calculate changes in quantity demanded for a particular product which has a short run price elasticity of demand equal to 0 .2 and a long run price elasticity of demand equal to 0 .7.

00:16 We'd like to find this percent change in quantity demanded in the short run and long run when our price increases from $1 .80 to $2 .20.

00:25 So let's recall what i've got written in blue here, that price elasticity of demand is equal to the percent.

00:30 Change in quantity demanded divided by the percent change in price, which can be written in different terms as you see right in here.

00:39 And this is just the midpoint method.

00:41 So this is what we're going to be using going forward.

00:44 This is one of the most accurate ways of calculating elasticity.

00:48 All right.

00:49 So let's just start to fill in what we have.

00:52 So for the short run, we know that we have a price elasticity equal to 0 .2.

00:57 So that's going to, we'll have 0 .2, which is equal to our percent change quantity demanded.

01:03 And this is what we're trying to find.

01:06 So our percent change and quantity demand, and that's our whole variable that we still need.

01:09 This is divided by, now is where our midpoint method comes in, this denominator here.

01:15 P2 minus p1 divided by p2 minus p1 divided by two.

01:20 Let's go ahead and do this.

01:21 We have $2.

01:23 $2 .20.

01:24 That's our p2, and our p1 is $1 .80.

01:28 So filling this in, we've got 2 .2, minus 1 .8, all of which gets divided by 2 .2 minus 1 .8, which that itself gets divided by 2.

01:46 So let's start simplifying a little bit here, which will give us 0 .2 equal to our percent change in quantity demanded still.

01:54 All of which gets divided by, let's see what we get here.

01:58 2 .2 minus 1 .8 will give us 0 .4, which is the same here, and 0 .4 divided by 2 gives us 0 .2...

Please give Ace some feedback