Gasoline: Long-run and Short-run Adjustments
- The quantity of gasoline purchased in the past week has plummeted. [check out his graph!]
- The price of gasoline has dropped almost to pre-Katrina levels.
- Gasoline and oil price futures have dropped to pre-Katrina levels.
His ultimate explanation: Demand curves are downward sloping.
But the effects of the price increases earlier this summer on the quantity demanded appeared with quite a lag. Have we been observing a long-run adjustment? a short-run adjustment? or a long-run adjustment triggered by a short-run phenomenon?
- If the latter, which seems likely, expect the quantity demanded to remain low for quite some time. Consistent with this prediction: a gas station I passed on the way home had a price below its pre-Katrina price.
- And if the latter, it is another nail in the coffin of instantaneous adjustment rational expectations models.
- And if it is the latter, one wonders what the short-run trigger will be that pricks the housing bubble.