Short run GDP elasticity of demand is larger than the long run elasticity for

Short run gdp elasticity of demand is larger than the

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Short-run GDP elasticity of demand is larger than the long-run elasticity for long-lived capital equipment, changes in investment in equipment magnify changes in GDP. Thus capital goods industries are considered “cyclical” affected by macroeconomic conditions (boom/recession) CYCLICAL INDUSTRIES cyclical industries Industries in which sales tend to magnify cyclical changes in gross domestic product and national income.
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32 of 49 CONSUMPTION OF DURABLES VERSUS NONDURABLES F IGURE 2.15 Annual growth rates are compared for GDP, consumer expenditures on durable goods (automobiles, appliances, furniture, etc.), and consumer expenditures on nondurable goods (food, clothing, services, etc.). Stock of durables is large compared with annual demand, short-run demand elasticities are larger than long-run elasticities. Like capital equipment, industries that produce consumer durables are “cyclical” (i.e., changes in GDP are magnified). This is not true for producers of nondurables. General Motors and General Electric are considered “cyclical”: Sales of cars and electrical appliances
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33 of 49 EXAMPLE 2.6 THE DEMAND FOR GASOLINE AND AUTOMOBILES TABLE 2.1 DEMAND FOR GASOLINE NUMBER OF YEARS ALLOWED TO PASS FOLLOWING A PRICE OR INCOME CHANGE ELASTICITY 1 2 3 5 10 Price 0.2 −0.3 −0.4 −0.5 −0.8 Income 0.2 0.4 0.5 0.6 1.0 TABLE 2.2 DEMAND FOR AUTOMOBILES NUMBER OF YEARS ALLOWED TO PASS FOLLOWING A PRICE OR INCOME CHANGE ELASTICITY 1 2 3 5 10 Price −1.2 −0.9 −0.8 −0.6 −0.4 Income 3.0 2.3 1.9 1.4 1.0
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34 of 49 Supply SUPPLY AND DURABILITY COPPER: SHORT-RUN AND LONG-RUN SUPPLY CURVES F IGURE 2.16 Like that of most goods, the supply of primary copper, shown in part (a) , is more elastic in the long run. If price increases, firms would like to produce more but are limited by capacity constraints in the short run . In the longer run, they can add to capacity and produce more.
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35 of 49 Part (b) shows supply curves for secondary copper. If the price increases, there is a greater incentive to convert scrap copper into new supply. Initially, therefore, secondary supply (i.e. supply from scrap) increases sharply. But later, as the stock of scrap falls, secondary supply contracts. Secondary supply is therefore less elastic in the long run than in the short run. COPPER: SHORT-RUN AND LONG-RUN SUPPLY CURVES F IGURE 2.16 TABLE 2.3 SUPPLY OF COPPER PRICE ELASTICITY OF: SHORT-RUN LONG-RUN Primary supply 0.20 1.60 Secondary supply 0.43 0.31 Total supply 0.25 1.50
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