Residential Electricity Commercial Electricity Residential Natural Gas
Short-run elasticity 0.24 0.21 0.12
Long-run elasticity 0.32 0.97 0.23

Interpret, in words, the short run elasticity of demand for residential electricity. Which sector (Residential or commercial) is more responsive to a 1% decrease in electricity prices in the short run? What about in the long run? By what percent would the quantity demanded change for these sectors?

Refer explanation

Explanation:

Price elasticity of demand is the % change in quantity demanded to a % change in price. There are five degrees of price elasticity of demand:

1. Perfectly elastic: Quantity demanded changes even without a change in price.

2. Elastic: Change in price causes a higher change in quantity demanded. PED > 1

3. Unit elastic: Change in price leads to a proportionate change in quantity demanded. PED = 1.

4. Inelastic: Change in price creates a lower change in quantity demanded. PED < 1

5. Perfectly inelastic: Even if price changes, there is no change in quantity demanded.

a. In the short run, PED for residential electricity is 0.24. This is less than 1, suggesting that PED is inelastic. Hence, a change in price will lead to a smaller change in quantity demanded.

b. Commercial electricity has a PED of 0.21 which is similar to residential electricity but it can be said that it is more price inelastic than residential electricity of 0.03 (0.24 - 0.21). Hence, a change in price will create an even smaller change in quantity demanded than residential electricity.

c.  In the long run, residential PED is 0.32 whilst commercial PED is 0.97. Whilst both are still inelastic, it can be said that commercial electricity demand is now much more responsive to price than it was in the short run. Since 0.97 is closer to 1, it can be assumed that a change in price will create an almost proportionate change in quantity demanded. The reason that both electricity demand is less inelastic in the long run is since now they have more time to adjust and switch to other substitutes.

d. Price elasticity of demand is calculated as the % change in quantity demanded divided by the % change in price.

PED  = % change in Qd / % change in price

When substituted for residential electricity in the long run

0.32 = % change in Qd / 1

0.32 x 1 = % change in Qd

% change in Qd = 0.32

When substituted for commercial electricity in the long run

0.97 = % change in Qd / 1

0.97 x 1 = % change in Qd

% change in Qd = 0.97