Question

The crucial difference between how the economy works in the long run and how it works in the short run is that prices are _________________ in the long run but __________ in the short run

Answer 1

Prices are more volatile in the short run, but more stable in the long run due to differences in supply and demand elasticity.

Step-by-step explanation:

In most markets for goods and services, prices bounce up and down more than quantities in the short run, but quantities often move more than prices in the long run. The underlying reason for this pattern is that supply and demand are often inelastic in the short run, so that shifts in either demand or supply can cause a relatively greater change in prices. However, since supply and demand are more elastic in the long run, the long-run movements in prices are more muted, while quantity adjusts more easily in the long run.