Factors determine the price elasticity of supply, Microeconomics

Factors determine the price elasticity of supply:

The price elasticity of supply varies widely across different products. Some products have more leastic supply, while others have less elastic supply. The major factors that determine price elasticity of supply are:

(i)The Availability and Mobility of Factors of Production
If factors of production are available then supply response quickly and largely to a change in the price of a product (i.e. supply then tends to be more elastic), but less elastic (inelastic) when factors of production are not available. The more easily factors can be transferred from the production of one good to that of another, the greater the elasticity of supply.

(ii)Influence of the weather

If output is controlled by weather conditions, as in the case of agriculture products, the output cannot be controlled by the producer. Hence the supply of such product tends to be less elastic (inelastic).

(iii)The Level of Technology

The extend to which output can be increased depends on the level of technology employed by the producer. Advanced technology used in production tends to make the supply of a product more elastic.

(vi)Cost of production

If the cost involved the production of a product is very high, output cannot be easily increased when the market price increases unless the icrease in price is great enough to absorb the cost.

(vii)Degree of perishability

The supply of highly a perishable commodity is relatively inelastic and that of a less perishable commodity is relatively elastic. The explanation is that highly perishable goods cannot be stocked for longer period to be relased when price for instance rises.

(viii)Time (Gestation Period)

Supply elasticity tends to be greater in the longer period. The longer the period, the easier it is to shift factors of production among products, following a change in their relative prices. This holds for agricultural products, becasue of the natural time lag between planting and harvesting of crops. In the short-run, the supply of most products tends to be relatively inelastic.

Posted Date: 1/2/2013 7:08:02 AM | Location : United States

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