Figure 4-7 Short-Run and Long-Run Equilibrium Following an
Increase in Demand
example relates to oil production. New oil fields can be discovered, wells
drilled, and pipelines built over years but not in a few months. Thus, the
elasticity of oil supply is much greater over five years than over one year.
As with demand, it is useful to make the distinction between the short-
run and the long-run supply curves. The short-run supply curve shows the
immediate response of quantity supplied to a change in price given
producers’ current capacity to produce the good. The long-run supply
curve shows the response of quantity supplied to a change in price after
enough time has passed to allow producers to adjust their productive
capacity.
The long-run supply for a product is more elastic than the short-run supply.Figure 4-7 illustrates the short-run and long-run effects of an increase in
demand. The immediate effect of the shift in demand is a sharp increase
in price and only a modest increase in quantity. The inability of firms to
change their output in the short run in response to the increase in
demand means that the market-clearing response is mostly an increase in
price. Over time, however, as firms are more able to increase production,
the consequences of the demand shift fall more on quantity and less on
price.