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A-Level Economics · J-curve diagram question

EVALUATION: the examiner wants a REASON why the short run differs from the long run. What is it?

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The diagram

The answer

Contracts — a firm already tied into a dollar oil contract must honour it at the new, higher pound cost until it comes up for renewal. Contracts are the justification. A London factory signs in dollars for American oil; the pound falls, the oil costs more, and it still has to go through with it. Name the mechanism instead of asserting the lag. Buyers are locked into agreements already signed, so they keep importing at the higher price until renewal — or until a termination clause and its notice period run out — and only then take time to find another supplier. Once contracts end and agents adjust to a permanently lower pound, elasticities rise, PEDx + PEDm exceeds 1, and the balance climbs from B through C to E.

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This is one of 6 questions on the j-curve diagram — every corner lettered, every wrong answer diagnosed.

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