The more time consumers have to adjust to price changes the lower is the price elasticity of demand.
True or false
The correct answer and explanation is:
True
The price elasticity of demand (PED) refers to how sensitive the quantity demanded of a good or service is to a change in its price. It can vary based on several factors, one of which is the time consumers have to adjust to price changes.
When consumers have more time to adjust to price changes, they tend to become less responsive or more “inelastic” in their demand for the product. This occurs because consumers can find alternatives, change their habits, or adjust their consumption patterns over time. For instance, if the price of gasoline rises suddenly, consumers may reduce their consumption by driving less in the short term. However, over time, they may switch to more fuel-efficient cars or use public transportation, leading to a less significant long-term reduction in demand.
In the short run, consumers may not have enough time to make these adjustments, and thus the demand may be more elastic or responsive to price changes. On the other hand, in the long run, they have more time to adjust, leading to a lower price elasticity of demand.
For example, if the price of electricity increases, consumers may initially continue to use the same amount. But over time, they may invest in energy-efficient appliances or adjust their lifestyle to consume less energy, making their demand for electricity less sensitive to price changes in the long term.
Therefore, as time passes, the price elasticity of demand tends to decrease because consumers become less responsive to price changes, and their behavior can adapt. This relationship between time and price elasticity is a key concept in economics, reflecting how demand becomes more inelastic the longer consumers have to respond to price changes.