The Effect of Length of Run on Measured Demand Elasticities

Abstract

This article is concerned with differences that can occur in measured demand elasticities because of varying lengths of adjustment period. Although it is generally accepted that length of run affects the elasticity of demand for use, its effect on the demand for stocks is not as widely recognized. The following analysis considers the effect of length of run on both of these components of the total demand for a commodity and then brings these results together to evaluate their joint effect on measured demand elasticities. Demand for use is shown to be more elastic in the long run when the relationship between commodities is either one of substitutability or complementarity. Also, conditions are presented under which the demand for a commodity for storage is more elastic in tbe short run. Finally, the condition necessary for the total elasticity of demand to have a ''U'' shape with respect to length of adjustment period is specified.I T IS generally accepted that the demand for most commodities is likely to vary for different lengths of adjustment period. This implies variation in the elasticity of demand associated with time.' Although the elasticity of demand is often considered to vary directly with time, empirical results obtained by Tomek and Pasour provide an example in which demand appears to be more elastic for a shorter length of run.Tomek estimated the price elasticity of demand for fresh apples at the farm level using annual data for the period 1947-1962. This estimate was -.46. 2 Pasour, using data for a similar period of time, divided the marketing year into three periods and computed seasonal elasticities at the farm level. Although a satisfactory relationship was not obtained in one of the periods, the coefficients of price elasticity of demand in the other two periods were -.75 and -1.33, both apparently higher than the estimate obtained by Tomek." Shepherd, in considering the effect of time, states that there are two opposing forces affecting the elasticity of demand.t On the one hand, short-time elasticities (e.g., day, week, or month) are likely to be greater than longer-time elasticities (e.g., year) since a larger proportion of the .. Published with the approval of the director of research as Paper No. 1971 of the Journal Series. The authors wish to acknowledge helpful comments from Paul R.

Effect of Length of Time on Measured Demand Elasticities: The Problem Revisited

“…Elasticity estimates based on shorter time periods usually differ from those based on longer time periods (Manderscheid 1964;Pasour and Schrimper 1965; Sexauer 1977). Elasticity estimates based on shorter time periods usually differ from those based on longer time periods (Manderscheid 1964;Pasour and Schrimper 1965; Sexauer 1977).…”

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INTRODUCTIONTo quote Manderscheid (1964, 131), "the length of time period being considered is quite important when specifying elasticities." Elasticity estimates based on shorter time periods usually differ from those based on longer time periods (Manderscheid 1964;Pasour and Schrimper 1965; Sexauer 1977). Shepherd (1963), in considering the effect of time, suggests that two opposing forces exist influencing the elasticity of demand: storage activities and product substitution.

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Short and Long Run Elasticities in Consumer Demand Theory

“…See [5]. They also claim that for commodities demanded for consumption (unlike demand for changes in storage), demand in the long run is more elastic.…”

“…Econ. (5) adjusting the levels of consumption of some products when prices change. Resulting changes in consumption of the remaining products are regarded as short run changes.…”

“…The short run response to changes in prices and in income will now be obtained from the solution to the following system: Substituting (4) in (5), the difference between short and long run response is given as follows:…”