Friday, February 5, 2010
Long-run Elasticity of Demand for Energy?
I just realised that the elasticity reported in my slides for the Hub workshop for the effect of the purchasing power parity variable on energy intensity is kind of a global price elasticity demand for energy in the long-run. Because it is estimated on averages for the 1971-2007 period it averages out all fluctuations in prices over time except countries' relative price levels compared to the United States. It also holds constant GDP and the level of overall technology (TFP). The only downside I can think of at the moment (but there may be many more) is that it holds the mix of fuels constant. I think you'd really want that to be variable. Anyway the elasticity is about -0.74 - inelastic but not that inelastic.
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What are the implications of an inelastic-but-not-that-inelastic demand for energy in the long run? I haven't pondered demand elasticities in a long time -- after all, I'm just a first year graduate student in economics.
ReplyDeleteOne way to look at it, is if demand is elastic then as the price of that good goes up the share of expenditure on it in total expenditure goes down and vice versa. The data we have shows that the cost share of energy has gone down over time together with its relative price historically. I guess the relative inelasticity of the elasticity shows how severe this effect is or is not.
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