Acquire Help To Get Details Of Price Elasticity Of Supply From Experts

Price elasticity of supply gauges the relationship among change in quantity supplied and a change in price.

If supply is elastic, producers can enlarge output without a increment in cost or a time delay

If supply is inelastic, firms discover it hard to change production in a specified time period.

The method for price elasticity of supply is:

Percentage change in quantity supplied separated by the percentage change in price

• When Pes = 0, supply is perfectly inelastic

• When Pes > 1, then supply is price elastic

• When Pes < 1, then supply is price inelastic

• When Pes = infinity, supply is perfectly elastic following a change in demand

Factors that have an effect on Price Elasticity of Supply

(1) Spare production capacity

If there is abundance of spare capacity then a business should be able to add to its output without a rise in costs and therefore supply will be elastic in response to a change in demand. The supply of goods and services is frequently most elastic in a recession, when there is abundance of spare labour and capital resources available to step up output as the economy recuperates.

(2) The ease and cost of factor substitution

If both capital and labour reserves are occupationally mobile then the elasticity of supply for a product is higher than if capital and labour cannot easily and rapidly be switched

(3) Stocks of finished products and components

If stocks of raw materials and finished products are at a high level then a firm is capable to respond to a change in demand quickly by supplying these supplies onto the market - supply will be elastic. On the other hand when stocks are low, dwindling supplies force costs higher and unless stocks can be replenished, supply will be inelastic in reply to a change in demand.

(4) Time period involved in the production process

Supply is more price elastic the greater the time period that a firm is allowed to change its production levels. In some agricultural markets for instance, the momentary supply is fixed and is resolute mainly by planting decisions made months before, and besides climatic conditions, which affect the overall production yield.

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