DEMAND ELASTICITIES: A COMMENT

This note considers the possibility of 'non-symmetric' or 'irreversible' price effects or 'hysteresis' in the transport demand relationship. The hysteresis hypothesis proposes that consumers, instead of responding similarly to rising and falling prices as is traditionally assumed, respond in a more complex manner. This response depends on the direction and size of previous price changes, and indeed on previous price history. Recent attempts to test the hypothesis include two studies of specific interest to the transport sector, concerned with estimates of the long-run price elasticity of fuel consumption. The results of these studies are presented in a table. Although the models used there may be oversimplified, they show that the response to prices is far more complex than would be predicted by traditional demand models. The author concludes that there will be a better basis for understanding the past and anticipating the future, by recognising that demand relationships and elasticities are the result of historical processes.