Short Run v. Long Run Elasticities

Boingggg boinggg. Flexing your mind like it’s elastic. Ready?

Elasticity describes the price sensitivity of buyers to changes in prices. This can apply both to firms, who need supplies (raw materials) and labor (workers) and consumers (like you, Tim).

A high elasticity toward a certain good means consumers are flexible with it. Price on your fave cereal went sky-high? Eh, that’s okay...you’ll just get the off-brand version. Low elasticity, which bottoms out at completely “inelastic,” means people aren’t flexible to price changes. They’ll still buy the thing, whatever the price is. Prices of oil rise, and you need gas to drive to work? Welp. Gotta suck it up and pay for it.

Now for the short and long of it. In the short-run, demand for goods is more likely to be inelastic. Take the gas example again for getting to work. In the short-run, you’ll suck it up and pay higher gas prices, because you drive a car to work. But if gas prices stay up, or maybe even continue to rise, you may eventually switch to public transportation.

Consumers have more time to change habits in the long-run, so elasticity is more, well...elastic...in the long-run. Prices of goods at the grocery store don’t rise and fall by exact pennies according to market supply and demand, like stocks do. Rather, they’re “sticky,” since they don’t change much in the short-run, but they do rise in the long-run.

Same with elasticity: consumers are “sticky” with their demand in the short-run, but in the long-run, they’ll make bigger changes in buying behavior response to price changes.