If the price of oil increases strongly and steadily what is

If the price of oil increases strongly and steadily, what is expected to occur to the elasticiy of supply and demand in the long run?

Solution

In the short run, demand and supply are relatively inelastic, because consumers cannot quickly switch to a substitute, and producers cannot switch to a cheaper factor of production to keep their price unchanged.

But as time passes, in the long run, increase in a good\'s price makes consumers switch to cheaper substitutes, and increase in the price of one factor of production makes producers switch to cheaper factor of production. That is, in the long run, degree of substitutability increases for both consumers and producers.

Therefore, compared to the short run, in the long run both elasticity of demand and of supply will be lower.