Are Price & Income Elasticities of Demand Constant? The UK Experience

The reductions in energy demand witnessed since the oil price shocks of the 1970s have lent undeniable evidence to the importance of prices in determining energy demand. Attempts to actually measure the influence of prices on the basis of econometric models, however, have resulted in a wide range of elasticities. Apart from differences in estimates based on international cross-section data and times-series observations for individud countries, elasticities were often found to be sensitive to the observation period used in the analysis.’ Just as elasticities based on pre-1974 data could not explain the response to the energy price increases of the seventies, estimates based on data including the high price era failed to explain the continued sluggish growth in demand as prices began to fall in the mid-eighties. Estimates based on more recent data began to suggest a lower elasticity than previous experience led us to believe, but the uncertainty of the estimates grew, rather than diminished, as more recent data became available. Had the price elasticity actually changed or had the models simply been unable to capture it?

By: J. M Dargay