Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Friday, September 16, 2005

Gasoline: Long-run and Short-run Adjustments

James Hamilton at Econbrowser has a superb discussion of these facts:
  • 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.
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