Question

Consider the difference between the short run of a few days or weeks and the long run of a few months or years. Suppose the price of gasoline goes up. How will the supply and demand curves be effected in the short run? What will happen to the equilibrium price and quantity of cars?

In the long run, how would your answer to part f. change?

Answer 1

Price of gasoline goes up . The quantity supplied and quantity demanded are often relatively slow to react to changes in price in the short run, but they change more substantially in the long run . The demand and supply is more inelastic in short run than in long run . Here gasoline is a very essential product . In the short run an alternative energy source cannot be easily found so the demand for gasoline in short run is rather inelastic in nature . It is also not easy to increase supply of gasoline in short run as new sources take time to be discovered . So as price of gasoline goes up , in the short run the equilibrium quantity is not affected to a large extent but equilibrium price rises .

But now we analyse the car market . People who already have cars can switch to other transport modes in the short run the save consumption of gasoline . So in the short run demand for cars falls . Also supply of cars falls as producers know that rise in price of gasoline will cause less demand for cars . The effect on equilibrium price of cars is ambiguous but equlibrium quantity falls .

In the long run , there will be alternative modes of energy found to drive cars . So demand for cars will increase again . Supply also will rise . This will cause increased equilibrium quantity demanded for cars . Effect on the price of cars depends upon degree of shift of the curves .