Price Effects in the Short and in the Long Run
Quaderni - Working Paper DSE N° 1040
49 Pages Posted: 28 Nov 2015
Date Written: November 27, 2015
We study a broad class of dynamic consumer problems and characterize the short and long-run response of the demand for a good to a permanent increase in its market price. Such response can be non-monotonic over time, and the short and long-run price-elasticity of demand may have opposite sign. This is a testable prediction and can arise even in the absence of income effects. Our results are robust to a variety of settings that are commonly used in the economic literature, and have relevant policy implications. We provide illustrative applications to models of human capital and labor supply, addiction, habit and taste formation, health capital, and renewable resources.
Keywords: Price elasticity, Non-monotonicity, Price-based policies
JEL Classification: D11, D91, I00
Suggested Citation: Suggested Citation