Factors affecting elasticity of supply

There are a few factors that determine how elastic supply (i.e. how responsive quantity supply is to changes in prices) for a particular good is:

– Time: Supply will be different in the short and long run with time. In the short run, firms will only be able to increase input of labour to increase supply of commodities. Supply change will be little because other factors of production may not be increased in the same proportion as the change in price and may limit the supply. However, in the long run a firm will increase the input of all factors of production and thus the supply becomes more price elastic.

– Availability of resources: If the economy is already using most of its scarce resources, then firms will find it difficult to employ more (i.e. workers) and so output will not be able to rise. The supply of most goods and services will therefore be price inelastic, and vice versa.

– Number of producers: If there are more producers, this means that the output can be increased more easily. Thus supply is more elastic as a result.

– Ease of storing stocks: The type of good that a producer supplies will affect elasticity. If goods can be stocked with ease and have a long shelf life, then supply will be elastic. Otherwise the goods will be inelastic. For example, perishable goods such as fresh flowers, vegetables have comparatively inelastic supply because it is difficult to store them for longer periods.

– Increase in cost of production as compared to output: In cases where there is a significant increase in cost of production when output is increased, supply is inelastic. This is because suppliers would have to make a significant investment in order to increase the output. This would take time and some suppliers may be hesitant in doing so.

– Improvements in Technology: Some industries will have improvements in technology that affects the price elasticity of supply. Improvements lead to goods being more elastic (i.e. firms are more efficient in production- better machinery so output is increased greater with increase in price) as compared to industries where there are less improvements.

– Stock availability of finished goods: In some industries where there are higher inventory or stock of finished goods, the supplier can supply more as the price rises. Thus, the price elasticity of supply for these goods will be elastic.

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31 Responses to Factors affecting elasticity of supply

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