Download The Second Law of Demand

3.c. The Second Law of Demand
The Second Law of Demand states that demand is more responsive to price in the long run than in
the short run. Initially, when the price of a certain good increases or decreases, consumption does not
change very drastically. However, when consumers are given more time to react to the change in price,
consumption can either increase or decrease very dramatically. (Demand is not only determined by price
but also factors such as: income, tastes, and the price of related goods)
Example 1:
Figure 3.c.1 shows the Second Law of Demand and how the demand for a good, such as gasoline
changes in the short run (A) and in the long run (B). The flatter, or more “elastic” demand curve (B) is
more reactive to the change in price.
Price
Gas
(B) 1 year
demand
(A) 1 week demand
(C) original price & qty
$20
(D)
(E)
$12
25 29
45
Quantity
Gas
Figure 3.c.1 shows what happens when the price of gas is reduced from $20 to $12. At the original price
of $20 (C), the quantity of gas consumed is 25 units. Within a week as the price is reduced to $12,
consumption only increases from $25 (C) to $29 (D). However, in the course of an entire year, with the
price of gas still at $12, consumption increases to $45 (E). This shows that with a given decrease in price,
the demand for gas and the quantity consumed increases more drastically in the long run than in the short
run. This fact is shown by the flatness (or elasticity) of the 1 year demand curve (B) as opposed to the 1
week demand curve (A).
The increased elasticity of the demand curve over time can be attributed to various factors. For
instance, if the price of gas is reduced from $20 to $12, consumers can get more gas for their money and
within that week they might decide to drive longer distances, drive more, or drive faster than they normally
would. However, if the price remains reduced for an entire year, consumers will have had much more time
to react to the change in price and might make more drastic/permanent adjustments. Consumers might
decide to purchase a gas-guzzling SUV, or even decide to drive to vacation areas rather than fly etc. This
of course would lead to a major increase in the consumption of gas.
Example 2:
The Second Law of Demand can also be applied to an increase in price, as well. One example is
the market for orange juice, as shown below in Figure 3.c.2.
Price
Orange
Juice
(A) 1 week
demand
(B) 1 year
demand
( C) original
price & qty.
$14
$10
24
35 37
Quantity
Orange Juice
Figure 3.c.2 indicates that the original price of orange juice is $10 and at 37 units (C). The graph shows
that when the price of orange juice rises from $10 to $14, consumption of orange juice falls from 37 units
to 35 units within a week. This relatively insignificant change in quantity consumed is represented by a
steep “1 week demand” curve (A). However, as a year passes, the price remains at $14 and consumption
drastically decreases to 24 units. This event is represented in the “1 year demand” curve (B), which is
clearly flatter than the “1 week demand” curve. The green arrow indicates the increased elasticity over
time and consumers’ long-run response to an increase in price.
Much like in the previous example with the gasoline, this example can also be applied to real-life
circumstances. Within a week after the increase of the price of orange juice, some consumers will perhaps
buy a little less of it. However, if the increased price of orange juice remains the same for an entire year,
more consumers might decide to buy no orange juice at all and instead completely substitute it with apple
juice, vitamin C tablets etc.