Are Elasticities Greater in the Long Run? Beyond Le Chatelier’s Principle
84 Pages Posted: 8 Jan 2016 Last revised: 15 May 2021
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: Suggested Citation