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Short-run vs Long-run, Price Controls

short-run versus long-run  

  • long run lets consumers/producers fully adjust to price change
  • demand - more price elastic in long run
    • consumers adjust habits over time
    • linked to another good that changes over time, more substitutes available later (knock-offs, competition)
    • short term - durable goods >> consumers hold onto >> no need to replace >> less demand
    • no new purchases >> less consumption in short run
    • over long term, will still need to be replaced >> more elastic
  • supply - percentage change in quantity supplied due to price change
    • same concept as demand elasticity
    • materials shortage >> bottlenecked production >> low elasticity (capacity constraint)
    • easy to get capital/labor/materials >> high elasticity (long run pattern)
    • durable goods >> can be refabricated >> smaller long-run elasticity

price controls - price ceiling/minimum set by organization (usually gov’t) 

  • ceiling below equilibrium >> excess demand
    • normally, suppliers would raise money, but can’t in this situation
    • could drive price above market price (ceiling) through auction, bribes
  • minimum (floor) below equilibrium >> no effect
  • ceiling above equilibrium >> no effect
  • minimum (floor) above equilibrium >> excess supply
  • excess demand - difference in quantity of demand and quantity of supply, calculated at the price ceiling


  • price ceiling
  • equilibrium can't be reached
  • at price ceiling, quantity demanded exceeds quantity supplied
  • suppliers not allowed to raise prices (legally)


  • price floor
  • equilibrium can't be reached
  • at price floor, quantity supplied exceeds quantity demanded
  • suppliers can't lower prices
Subject X2: 

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