Unformatted text preview: 2. Time horizon and elasticity Aa Aa a The time horizon of the demand curve is one determinant of the price elasticity of demand. Compared to the short-run demand for oil, the demand for oil in the long run will tend to be more ‘/ elastic. Explanation: Close A More substitutes are available in the long run than in the short run. If oil prices rise sharply, firms that currently use
oil or oil-based products to produce goods and services will not be able to switch quickly to another energy input.
Furthermore, consumers who rely on products derived from oil, such as gasoline for cars, will ﬁnd it difficult to switch
to alternative fuels in the short run. In the very short run, the demand for oil is, therefore, highly inelastic. If the price of oil stays high for a long period
of time, firms and families will begin substituting away from oil-intensive activities and products. Firms may adopt
alternative energy sources such as solar, coal, or ethanol. Households may begin to drive less and drive more
fuel-efﬁcient cars when they do. Since buyers of oil and oil-based products can pursue more alternatives to oil in the
long run, the long—run price elasticity of demand for oil is larger than short-run elasticity. ...
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