Question

It is observed from the consumer's behaviour that demand in the short run is much less elastic (or more inelastic) than in the long run. Let us take the example of petrol. Petrol is an essential part of modern life, which is a 'luxurious necessity'. The single most important reason for a persistent deficit in our Balance of Payments is the oil pool deficit', Nevertheless, life is literally immobile without it. India faced two oil shocks in 1973 and 1979. As a part of expenditure reducing

policy, price of petrol was hiked up. In the beginning, consumers reacted by cutting down on their vaccation trips by car, going to office in car pools and using public transport system. Besides this, they had little choice but to pay a higher price. The average petrol consumption decreased by 5-7%. After several years, we found that people showed a distinct pattern, especially in the urban areas to move to jobs, closer to their residence. The phenomenal success of the Maruti 800 in mid 1980s was be cause of the lower petrol consumption by excellent fuel efficiency technology of this car. People distinctly preferred the Maruti more for the lower running cost than for the relatively lower cost. By late 1980s, we have found that the price elasticity of demand has been falling by more than 20%.

The long run demand for petrol is more elastic than the short run demand. Data given here show that this is true for most of the commodities.

Answer 1

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