Illustrative Examples of Time Horizon's Effect on Price Elasticity

📚 Quick Study Guide

• ⏱️ Price elasticity of demand (PED) measures how much the quantity demanded of a good changes when its price changes.
• ⏳ The longer the time horizon, the more elastic the demand tends to be. This is because consumers have more time to adjust their consumption habits.
• 📊 Formula: $PED = \frac{\% \ change \ in \ quantity \ demanded}{\% \ change \ in \ price}$
• 📅 Short-run: Immediate reaction to price changes. Limited options for consumers.
• 🗓️ Long-run: Consumers can fully adjust. More substitutes can be found.
• 🚗 Example: Gasoline demand is inelastic in the short run but becomes more elastic in the long run as people can buy more fuel-efficient cars or use public transport.
• 🏠 Example: Housing demand becomes more elastic over time as people can relocate to different areas.

Practice Quiz

1. Question 1: Which of the following best describes the relationship between the time horizon and price elasticity of demand?
   1. A) As the time horizon increases, demand becomes more inelastic.
   2. B) As the time horizon increases, demand becomes more elastic.
   3. C) The time horizon has no effect on price elasticity of demand.
   4. D) Price elasticity of demand is only affected by the availability of substitutes.
2. Question 2: In the short run, the demand for gasoline is generally considered to be:
   1. A) Perfectly elastic
   2. B) Elastic
   3. C) Inelastic
   4. D) Unit elastic
3. Question 3: Over a longer time horizon, consumers can adjust to an increase in the price of coffee by:
   1. A) Switching to tea or other beverages.
   2. B) Reducing their caffeine intake.
   3. C) Continuing to buy coffee at the higher price.
   4. D) Ignoring price changes altogether.
4. Question 4: A sudden increase in electricity prices is likely to have what kind of impact on demand in the short run?
   1. A) A large decrease in demand.
   2. B) A small decrease in demand.
   3. C) No change in demand.
   4. D) A large increase in demand.
5. Question 5: Which of the following is an example of a long-run adjustment to increased housing costs?
   1. A) Turning off lights to save electricity.
   2. B) Buying a smaller house in the same area.
   3. C) Moving to a less expensive city or state.
   4. D) Renting out a spare room.
6. Question 6: If the price of a specific brand of cereal increases, and consumers switch to a different brand relatively quickly, this indicates:
   1. A) Inelastic demand in the short run.
   2. B) Elastic demand in the short run.
   3. C) Perfectly inelastic demand in the long run.
   4. D) Perfectly elastic demand in the long run.
7. Question 7: The demand for luxury cars tends to be more elastic in the long run because:
   1. A) People's incomes always increase over time.
   2. B) Consumers have more time to save money for expensive purchases.
   3. C) More affordable alternatives or substitutes may emerge.
   4. D) Luxury car manufacturers never change their prices.