Long-run Demand Elasticities Research Articles

Bootstrapping demand and supply elasticities: The Indian case

We discuss bootstrap confidence intervals for short-run and long-run demand and supply elasticities for imports and exports. We use Koshal, Shukla and Koirla's (1992) simultaneous equation demand and supply model for Indian exports based on 1960–1986 data. Although the long run price elasticity of supply is large, (about 25) and significant, the asymptotic as well as bootstrap confidence intervals remain wide. Hence price reduction by devaluation of Indian Rupee alone may not have been enough to spur the major export growth experienced in the early 1990s. We discuss the potential uses of relatively simple bootstrap methods in the context of the delta method for standard errors of long run elasticities, pivoting transform, nonlinearities and nonnormality. ( JEL F14, C12, CIS, C30)

Short and long-run elasticities of nitrogen demand : an application of cointegration to Italian data

Nous nous efforçons d'évaluer l'élasticité prix de la demande d'azote minéral en Emilie-Romagne, l'une des régions les plus touchées par l'eutrophisation des eaux. Il est important de savoir, pour des besoins de politique économique, si la demande d'engrais est élastique par rapport à son prix, lorsque l'on souhaite réduire la consommation d'intrants polluants. Or, les auteurs ne sont pas d'accord sur le niveau de l'élasticité prix de la demande d'azote. Nous utilisons un modèle dynamique à une équation, sous contrainte de maximisation du profit, où la demande optimale d'azote dépend de son prix, des prix escomptés à la production et des surfaces occupées. Les modèles dynamiques à une équation sont utilisés depuis longtemps pour mesurer la demande d'engrais, la relation d'équilibre étant associée à une hypothèse d'ajustement partiel. Afin d'éviter les problèmes afférents à cette hypothèse, nous estimons les paramètres d'équilibre à l'aide d'un modèle à correction d'erreurs (ECM). Pour cela, il est indispensable que les variables utilisées soient cointégrées. Nous vérifions la cointégration de deux façons : en utilisant les régressions statiques d'Engle-Granger ou la méthode du maximum de vraisemblance mise au point par Johansen. Avec ce modèle à correction d'erreur : 1) l'ajustement à une situation d'équilibre de court terme est d'environ 29% par an ; 2) l'élasticité prix de la demande d'azote est de -0,87 à court terme, et de -1,82 à l'équilibre ; 3) une hausse de 2% du prix réel de l'engrais conduirait à faire baisser sa demande de 1,6% à court terme et de 3,8% à long terme 4) une réduction prolongée des surfaces utilisées aboutit à réduire la consommation d'azote à long terme, même si l'élasticité par rapport aux facteurs fixes est nettement inférieure à 1. En simulant la mise en vigueur d'une taxe verte, nous montrons que la consommation d'azote a des chances d'être considérablement réduite quand on augmente son prix de 10 à 20%. Nous constatons aussi que le recours à une taxe peu élevée, mais sur une longue période, a plus d'incidence sur la consommation d'azote qu'une taxe plus élevée. Cela signifierait donc qu'une évolution de la technologie peut être induite par une hausse prolongée des prix.

Elasticity estimates from a dynamic model of interrelated demands for private and public acute health care

This paper investigates the private/public mix in acute health care provision in the UK. It uses an interrelated shares model derived from a translog function combined with dynamic adjustment. Using prices for public care constructed from NHS waiting lists, the insurance cost of private care and the retail price index, impact, intermediate and long run elasticities of demand for private and public care are obtained. The role of hospital consultants and of an aging population are also considered.

Cigarette consumption in Spain: empirical evidence and implications for public health policy

The partial adjustment (‘habit-persistence’) model is used to analyse the behaviour of the demand for cigarettes in Spain over the period from 1964 to 1988. On that basis, the short- and long-run elasticities of demand with respect to price, income and advertising intensity are estimated. The model also provides and estimation of the effects that the anti-smoking policies implemented during the period might have had on consumption. The results are used to anticipate the probable impact on sales of a total ban on advertising, and to design a suitable method to finance a health education campaign about the risks of smoking.

Modelling supply in an open economy using a restricted cost function

An extended version of the Morrison restricted cost function is applied to an analysis of the supply side in an open economy (Ireland). Production location is a decision variable for firms supplying a world market. Firms choose the location of production and then the factor mix within each country. Long-run demand elasticities are calculated permitting output in individual countries, as well as the quasifixed factor capital, to adjust to their optimal level. When allowance is made for the possibility of changing the location of production, the elasticity of demand for domestic production factors is found to be high.

The long-run elasticity of demand for commuter rail transportation

The long-run elasticity of demand for commuter rail transportation

Dynamic adjustments in the United States and Canadian construction industries

A factor demand dynamic model is estimated for the Canadian and United States construction industries using quarterly data from 1979 through 1986. The model allows for the existence of adjustment costs in the industry, related for example, to the innovative nature of some products. The demand for nonveneered structural wood panels is consistent with the behavior of an innovative product in the United States but not in Canada. A labor–capital composite input is not quasi-fixed in either country. Short-run adjustments, long-run demand elasticities, and biases of technical change are also derived. A decomposition analysis is used to investigate factors underlying the demand substitution of nonveneered structural wood panels for plywood.

The Impact of a Gasoline Tax on Auto Exhaust Emissions

The EPA implements its policy of exhaust emission control by setting standards specified in terms of grams of pollutants per mile traveled. As a result, the tax must first restrain the vehicle miles traveled (VMT) if it is to have an impact on emission at all. EPA's choice of miles traveled as the medium through which its policy of pollution control must run is unfortunate, because travel is an activity that people resist giving up. This is reflected in a low long-run price elasticity of travel demand. Consequently, it takes substantial increases in the gasoline tax to make an impact on long-run travel demand. Simulation results show that under an alternative policy option, where EPA's standards are specified in terms of grams of pollutant per gallon of fuel burned, the same long-run reduction in exhaust emissions achievable today can be achieved (at an even higher level of confidence) with less than one-tenth of the increase in gasoline price required under the existing policy regime.

Residential energy conservation choices of poor households during a period of rising fuel prices

This study models the production and consumption of residential space heat, a non-market good. Production reflects capital investment decisions of households; consumption reflects final demand decisions given the existing capital stock. In the model, the production relationship is represented by a translog cost equation and an energy factor share equation. Consumption is represented by a log-linear demand equation. This system of three equations - cost, fuel share and final demand - is estimated simultaneously. Results are presented for two cross-sections of households, surveyed in 1973 and 1981. Estimates of own-price and cross-price elasticities of factor demand are of the correct sign, and less than one in magnitude. The price elasticity of final demand is about − 0.4; the income elasticity of final demand is less than 0.1. Short-run and long-run elasticities of demand for energy are about − 0.3 and − 0.6, respectively. These results suggest that price-induced decreases in the use of energy for space heat are attributable equally to changes in final demand and to energy conservation, the substitution of capital for energy in the production of space heat. The estimated model is used to simulate the behavior of poor and non-poor households during a period of rising energy prices. This simulation illustrates the greater impact of rising prices on poor households

The Elasticity of Demand for Health Maintenance Organizations

This paper analyzes a national sample of firms where employees faced a choice between a Health Maintenance Organization (HMO) and a conventional insurer such as Blue Cross. A regression analysis is specified as a partial adjustment model and a logit functional form. The long-run price elasticity of demand for HMOs is estimated to be -0.6. To the extent that employers pass on increases in the total premium, the price elasticities facing insurers are higher. Furthermore, the demand for HMOs is a negative function of the copayment charged by the HMO for an office visit.

Micro Engineering Foundations of Energy-Capital Complementarity: Solar Domestic Water Heaters

This paper presents microeconomic estimates of substitution possibilities between capital-intensive, solar-produced energy and conventional, nonrenewable energy sources, while examining the conditions under which recently enacted tax incentives designed to accelerate solar's market penetration could result in an increase, rather than a reduction, in the consumption of nonrenewable energy sources. The empirical results imply that such counter-productive outcomes are possible, given long-run elasticities of demand for energy services around 1.5.

Demand for gasoline for usage by passenger cars

The paper contains the results of estimating the behavioral relationships that determine the consumption of gasoline per capita via the usage of passenger cars. The variables that are explained are the number of cars per capita, the miles driven per car, and the miles driven per gallon of gasoline. These variables are explained by the price of gasoline, the price of cars, the gross national product per capita, and the lagged corresponding variables. The important result that emerges is that the long-run elasticity of demand for gasoline is about unity.

Interfuel substitution and energy consumption in the industrial sector

This paper examines the possibilities for fuel substitution in the industrial sector. First, we determine the total demand for fuel and power for the industrial sector from 1955 to 1972. We then examine fuel substitution possibilities for electricity and eight major fossil fuels consumed by the industrial sector. These are coal, natural gas, residual oil, distillate oil, kerosene, liquefied petroleum gas, still gas and petroleum coke. The analysis includes an estimation of the fuel split equations, the dynamic simulation of the industrial sector demands for fuel and the computation of short- and long-run demand elasticities for each fuel.

Price Elasticities of Nonbusiness Air Travel Demand

This paper describes a study of the historic evolution of nonbusiness air travel in the United States. A model is constructed and calibrated to describe this evolution. The purpose of the study is to investigate the sensitivity of this type of air travel to price changes using the elasticity as a measure. It is concluded that both short run and long run elasticities of demand are less than unity. Air travel demand appears to have been determined primarily by the developments in income and consumption levels.

Human and Nonhuman Wealth in Demand-for-Money Functions

Using Kendrick's recently published data on human and nonhuman wealth in the United States, log-linear money demand functions of the "partial adjustment" variety are estimated by introducing in each nonhuman, total, or human wealth as the scale or the "constraint" variable. It is found that the long-run elasticity of money demand with respect to nonhuman wealth is somewhat larger than that with respect to total wealth, and the elasticity with respect to human wealth is the lowest. Such a structure in the elasticities is observed consistently, although differences between the elasticities are not large and perhaps not statistically significant.

Long-run elasticity of US energy demand: A process analysis approach

In 1970 the authors undertook a study for the Shell Oil Company of the long-run elasticity of US energy demand. The methodology of the study is described and the results are summarized. It is argued that the process analysis approach, which makes use of subjective judgement, has certain advantages over more formal econometric approaches and is of relevance to current work in energy demand forecasting.

Forecasting demand for electricity in Maryland: An econometric approach

Most of the models for forecasting demand for energy are based on simple extrapolations of past trends or on a simple regression equation with price of the energy and the stock of appliances as explanatory variables. In this paper, an attempt has been made to derive static and dynamic multiple regression equations from economic theory of consumption and production (Section II). Historical data were fitted to these theoretical constructs to test the equations in terms of econometric theory and forecast the demand according to “higher order conditional interval forecasts”. The residential demand for electricity is a function of its price, price of its substitute, per capita income and a lagged demand variable for dynamic adjustment of actual demand to equilibrium demand for electricity. The forecasts of residential demand to 1990 are based on projections of exogenous variables such as residential price of electricity, per capita income and the estimated long run elasticity of demand (Section III). The nonresidential demand for electricity is a function of employment in that sector, sectoral prices of electricity and the lagged sectoral demand. The forecasts of nonresidential electricity demand are also based on projections of its independent variables (Section IV). The last section converts the total demand for electricity into the required generating capacities and juxtaposes them against the estimates of expected supplies available from the forecasts of the utilities. The paper concludes that the eighties will be faced with excess supply of electricity in Maryland, in case the assumptions of projections of independent variables hold good. The misallocation of resources inherent in such excess supplies could be avoided if realistic scenerios of future demand, as attempted in this paper, could be predicted.

Minimum Wages and the Long-Run Elasticity of Demand for Low-Wage Labor

I. Introduction, 267. — II. The model, 269. — III. The data, 272. — IV. Empirical findings, 274. — V. An alternative approach, 275.

New Evidence on the Demand for Housing

Several studies of demand have been completed within the past decade [3; 4; 5; 6; 7]. Because of the controversy surrounding their results, this study, using state data for the year 1960, was undertaken to derive additional estimates of the long-run demand elasticities. What differentiates this study are the more precise definition of the concept quantity of housing and the addition of new explanatory variables which the use of state data made it possible to consider.

Statistical Estimation of Long-Run Elasticities of Supply and Demand

Statistical Estimation of Long-Run Elasticities of Supply and Demand