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

Open Access Article

Abstract:
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: C51: Model Construction and Estimation, Q41: Energy: Demand and Supply; Prices, G12: Asset Pricing; Trading Volume; Bond Interest Rates, Q33: Resource Booms, C52: Model Evaluation, Validation, and Selection, Q42: Alternative Energy Sources, Q35: Hydrocarbon Resources

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.