We can use the price-change formula to predict the effects of a change in demand on equilibrium prices in the short run and long run. Suppose a national advertising campaign increases the demand for milk by 3 percent. The price elasticity of demand for milk is 0.20 and the short-run price elasticity of supply is 0.10. Therefore, in the short run the equilibrium price of milk will increase by 10 percent. For example, if the initial price was $3.50 per gallon, the increase in demand would increase the price to $3.85.
Percentage change in equilibrium price = 3 % / (0.10 + 0.20) = 3% / 0.30 = 10%
In the long run, the price elasticity of supply is 2.50, and the equilibrium price of milk will be only 1.1 percent higher than the original price.
Percentage change in equilibrium price = 3 % / (2.50 + 0.20) = 3% / 2.70 = 1.1% For example, if the initial price was $3.50 per gallon, the increase in demand would generate a long-run price of $3.54