Are Elasticities Greater in the Long Run? Beyond Le Chatelier’s Principle

84 Pages Posted: 8 Jan 2016 Last revised: 15 May 2021

See all articles by Juan Camilo Castillo

Juan Camilo Castillo

University of Pennsylvania - Department of Economics

Date Written: May 14, 2021

Abstract

A classical result in microeconomics is that supply is more elastic in the long run than in the short run. This result is obtained from Le Chatelier’s principle in a static environment. I build a more realistic, dynamic model in which firms take into account intertemporal relations. The classical result holds when firms produce intertemporal complements. But the opposite holds with intertemporal substitutes: firms are most responsive to short-lived shocks, and their initial response to permanent shocks is greater than the final response. I extend these results to consumer theory, and I apply them to carbon regulation and optimal taxation.

Keywords: Firm Behavior, Elasticity of Supply, Intertemporal Firm Choice

JEL Classification: D01, D21, D25, L11

Suggested Citation

Castillo, Juan Camilo, Are Elasticities Greater in the Long Run? Beyond Le Chatelier’s Principle (May 14, 2021). Available at SSRN: https://ssrn.com/abstract=2712165 or http://dx.doi.org/10.2139/ssrn.2712165

Juan Camilo Castillo (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

HOME PAGE: http://www.jc-castillo.net

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