Chapter 19, Problem 1CTQ

To determine

The price elasticity of demand for cigarettes in the short run vs the long run (A decade).

Introduction:

Price Elasticity of Demand – If for a one unit change in the price, the demand increases more than proportionately the demand is said to be elastic. If however, the responsive change in demand is less than proportionate the demand is said to be inelastic while it is said to be unit elasticity if the percentage change in demand is equal to the percentage change in price. If elasticity is ‘e’ then it is defined as:

$e=\frac{\%\Delta Q}{\%\Delta P}$

If e > 1, the demand is elastic

e < 1, the demand is inelastic

e = 1, the demand is unit elastic

e → ∞, the demand is perfectly elastic

e = 0, the demand is perfectly inelastic

Short vs Long-term elasticity of demand- The demand is relatively inelastic in the short run while that, in the long run, is elastic. For example, the demand for diesel by a manufacturer for the production of goods is inelastic in the short run as he cannot make adjustments in the production process or equipment. In the long run, however, the manufacturer can resort to fuel-efficient production technology and employ advanced equipment if the prices of diesel continue to rise. He would substitute diesel for a more cost-effective fuel in the long run. In the long run thus, demand is more elastic.