This is “Consumption Decisions in the Short Run and the Long Run”, section 3.7 from the book Managerial Economics Principles (v. 1.0).
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The main reason most consumers are unable to respond very quickly to an increase in gasoline prices is because there is not an effective substitute for automobile travel. However, if consumers were convinced that gasoline prices were going to continue to rise into the foreseeable future, they would gradually make changes to their lifestyles so that they are able to reduce gasoline consumption significantly. They could purchase more fuel-efficient cars or cars that use an alternative fuel, or they could change jobs or change residences so that they are closer to their places of employment, shopping, and such.
Economists distinguish short-run decisions from long-run decisions. A consumer decision is considered short runA time frame that occurs soon enough that individuals' consumption decisions are constrained by household assets, personal commitments, and know-how. when her consumption will occur soon enough to be constrained by existing household assets, personal commitments, and know-how. Given sufficient time to remove these constraints, the consumer can change her consumption patterns and make additional improvements in the utility of consumption. Decisions affecting consumption far enough into the future so that any such adjustments can be made are called long-runA time frame that is far enough in the future that individuals can make adjustments in their consumption decisions that will improve their utility or satisfaction. decisions.
Demand functions and demand curves can be developed for short-run or long-run time horizons. Short-run demand curves are easier to develop because they estimate demand in the near future and generally do not require a long history of data on consumption and its determinant factors. Because long-run demand must account for changes in consumption styles, it requires longer histories of data and greater sophistication.
Elasticities of demand in the short run can differ substantially from elasticities in the long run. Long-run price elasticities for a product are generally of higher magnitude than their short-run counterparts because the consumer has sufficient time to change consumption styles.
There is so much uncertainty about long-run consumption that these analyses are usually limited to academic and government research. Short-run analyses, on the other hand, are feasible for many analysts working for the businesses that must estimate demand in order to make production decisions.