Causes of Difference between Short-Run and Long-Run Demand

This article will help you to learn about the causes of difference between short-run and long-run demand.

Causes of Difference between Short-Run and Long-Run Demand

The following points highlight the two main causes of difference between the short-run and long-run demand for a good. The causes are: 1. Cultural Lag 2. Investment of Capital by the Consumers to Change the Structure of Consumption.

Cause # 1. Cultural Lag:

If the price of a good changes at present, then its influence on the tastes, habits and attitudes of the buyers and on the prices of the rival goods would be unfolding over a long period of time. One of the reasons for this is the defects and shortcomings in the system of communicating the information regarding the markets over the length and breadth of the country.

As a consequence of this, the buyers may get belated information about changes in the relative prices of the substitute commodities. Again, changes in the pattern of using the goods on the basis of new prices may take some time to take place. Even some research work may be needed in order take advantage of the falling prices, especially if the goods concerned are newly innovated goods.

For example, if the telephone charges of distant calls are reduced and if these prices become less than the costs of the existing means of communication like the postal system, even then the use of telephones would increase after a considerable lapse of time, especially when the telephones are not close substitutes of other means of communication.

Cause # 2. Investment of Capital by the Consumers to Change the Structure of Consumption:

In order to enjoy the advantage of a fall in the prices of goods, the consumers sometimes would have to invest money in order to buy the newly introduced models of some durable goods and equipment’s.

For example, if the prices of frozen food products diminish, then the demand for such products would increase. But before actually buying these products they would have to buy refrigerators with a large capacity to store the food.

Ttherefore, that if the price of a good decreases and/or the income of the buyers increases, then the demand for the good would rise in the short run. The new and increased amount of demand in this case is called the short-run demand.

However, the influence of a fall in the price of a good and/or a rise in the income of the buyers upon the demand for the good may work itself out over a long period. The increased amount of demand that is obtained in the long run is called the long-run demand. The causes of the difference between the short-run demand and the long-run demand.