## Elasticity: A Measure of Response

Read this chapter to learn about the concept of elasticity. Be sure to read Sections 5.1-5.4 following the introduction.

### The Price Elasticity of Demand

#### Time

Suppose the price of electricity rises tomorrow morning. What will happen to the quantity demanded?

The answer depends in large part on how much time we allow for a response. If we are interested in the reduction in quantity demanded by tomorrow afternoon, we can expect that the response will be very small. But if we give consumers a year to respond to the price change, we can expect the response to be much greater. We expect that the absolute value of the price elasticity of demand will be greater when more time is allowed for consumer responses.

Consider the price elasticity of crude oil demand. Economist John C. B. Cooper estimated short- and long-run price elasticities of demand for crude oil for 23 industrialized nations for the period 1971–2000. Professor Cooper found that for virtually every country, the price elasticities were negative, and the long-run price elasticities were generally much greater (in absolute value) than were the short-run price elasticities. His results are reported in Table 5.1 "Short- and Long-Run Price Elasticities of the Demand for Crude Oil in 23 Countries". As you can see, the research was reported in a journal published by OPEC (Organization of Petroleum Exporting Countries), an organization whose members have profited greatly from the inelasticity of demand for their product. By restricting supply, OPEC, which produces about 45% of the world's crude oil, is able to put upward pressure on the price of crude. That increases OPEC's (and all other oil producers') total revenues and reduces total costs.

Table 5.1 Short- and Long-Run Price Elasticities of the Demand for Crude Oil in 23 Countries

CountryShort-Run Price Elasticity of DemandLong-Run Price Elasticity of Demand
Australia−0.034−0.068
Austria−0.059−0.092
China0.0010.005
Denmark−0.026−0.191
Finland−0.016−0.033
France−0.069−0.568
Germany−0.024−0.279
Greece−0.055−0.126
Iceland−0.109−0.452
Ireland−0.082−0.196
Italy−0.035−0.208
Japan−0.071−0.357
Korea−0.094−0.178
Netherlands−0.057−0.244
New Zealand−0.054−0.326
Norway−0.026−0.036
Portugal0.0230.038
Spain−0.087−0.146
Sweden−0.043−0.289
Switzerland−0.030−0.056
United Kingdom−0.068−0.182
United States−0.061−0.453

For most countries, price elasticity of demand for crude oil tends to be greater (in absolute value) in the long run than in the short run.