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Estimating Short and Long-Run Demand Elasticities: A Primer with Energy-Sector Applications

Many empirical exercises estimating demand functions, whether in energy economics or other fields, are concerned with estimating dynamic effects of price and income changes over time. This paper first reviews a number of commonly used dynamic demand specifications to highlight the implausible a priori restrictions that they place on short and long-run elasticities. Such problems are easily avoided by adopting a general-to-specific modeling methodology. Second, it discusses functional forms and estimation issues for getting point estimates and associated standard errors for both short and long-run elasticities - key information that is missing from many published studies. Third, our proposed approach is illustrated using a dataset on Minnesota residential electricity demand.

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Energy Specializations: Electricity; Electricity – Markets and Prices ; Electricity – Other; Energy Modeling – Energy Data, Modeling, and Policy Analysis

JEL Codes:
L94 - Electric Utilities
D42 - Market Structure, Pricing, and Design: Monopoly
Q49 - Energy: Other
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination

DOI: 10.5547/01956574.36.1.7

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Published in Volume 36, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.