Factors that Determine Elasticity of Supply

FACTORS THAT DETERMINE ELASTICITY OF SUPPLY

The elasticity of supply depends on the following factors

The value of price elasticity of supply is positive, because an increase in price is likely to increase the quantity supplied to the market and vice versa. The elasticity of supply depends on the following factors:

SPARE CAPACITY

How much spare capacity a firm has - if there is plenty of spare capacity, the firm should be able to increase output quite quickly without a rise in costs and therefore supply will be elastic

STOCKS

The level of stocks or inventories - if stocks of raw materials, components and finished products are high then the firm is able to respond to a change in demand quickly by supplying these stocks onto the market - supply will be elastic

EASE OF FACTOR SUBSTITUTION

Consider the sudden and dramatic increase in demand for petrol canisters during the recent fuel shortage. Could manufacturers of cool-boxes or producers of other types of canister have switched their production processes quickly and easily to meet the high demand for fuel containers?

If capital and labour resources are occupationally mobile then the elasticity of supply for a product is likely to be higher than if capital equipment and labour cannot easily be switched and the production process is fairly inflexible in response to changes in the pattern of demand for goods and services.

TIME PERIOD

Supply is likely to be more elastic, the longer the time period a firm has to adjust its production. In the short run, the firm may not be able to change its factor inputs. In some agricultural industries the supply is fixed and determined by planting decisions made months before, and climatic conditions, which affect the production, yield.