Demand elasticity also depends to a great extent on the time period being
considered. Because it takes time to develop satisfactory substitutes, a
demand that is inelastic in the short run may prove to be elastic when
enough time has passed. A dramatic example of this principle occurred in
1973–1974 when output restrictions by the Organization of Petroleum
Exporting Countries (OPEC) increased the world price of oil by 400
percent. In the short run, which lasted several years, the demand for oil
was very inelastic. In the long run, however, the high price of oil led to
significant adjustments, such as the use of smaller and more fuel-efficient
cars, more efficient home heating, and alternative fuel sources. The same
general principle applies whenever consumers or firms adjust their
buying habits in response to a price change.
The response to a price change, and thus the measured price elasticity of demand, will tend to
be greater the longer the time span.For products for which substitutes only develop over time, it is helpful to
identify two kinds of demand curves. A short-run demand curve shows the
immediate response of quantity demanded to a change in price. The
run demand curve shows the response of quantity demanded to a change
in price after enough time has passed to develop or switch to substitute
products.
Note that this distinction between short-run and long-run demand curves
is relevant for both price increases and price decreases. Figure 4-4 shows
the short-run and long-run effects of a price reduction caused by an
increase in supply. In the short run, the supply increase leads to a