Factors affecting/Determinants of Price Elasticity of supply
- Cost of production. The higher the cost of production, the more inelastic the supply of the commodity and the lower the cost of production; the higher the elasticity of supply.
- Gestation period (Length of the production process). The longer the gestation period, the lower the elasticity of supply and the shorter the gestation period, the higher the elasticity of supply.
- Level of technology. The higher the level of technology e.g., use of modem techniques of production the higher the elasticity of supply while the lower the level of technology (use of inelastic production techniques) the lower the elasticity of supply
- Degree of availability of factor inputs. The supply of the commodity whose factor inputs are readily available tends to be elastic but the supply of the commodity whose inputs are scarce tends to be inelastic.
- Degree of entity of firms in the production process. Free entry of firms in the production process increases the number of producers of the product hence elastic supply while restricted entry of firms in the production process leads to inelastic supply e.g., the case of a monopolist.
- Degree of factor mobility. Factor mobility refers to the ease with which a factor of production be changed from one occupation/geographical location to another. Highly mobile factors of production make the supply of the commodity elastic while immobile factors of production make supply inelastic.
- Government policy of taxation. High taxes imposed by the government on producers increase the cost of production hence inelastic supply. However subsidization of producers by the government reduces the cost of production hence elastic supply.
- Price expectation. An expected future price fall by the producer relative to the current prices makes the current supply of the commodity elastic. But the expected future price increase by the producer relative to the current prices makes the current supply inelastic.
- The nature of the product (commodity). Durable commodities have elastic supply. This is because they can be stored for a long time and any increase in price is accompanied by an increase in price. On the other hand, perishable commodities have inelastic supply because they cannot be stored for a long time such that if there is an increase in price nothing can be supplied.
- Objectives of the firm. A firm whose objective is to maximize sales is associated with elastic supply of the commodity while a firm whose objective is to maximize profits, the supply of the commodity tends to be inelastic.
- Time. This can be short run or long run. In the long run supply becomes elastic since producers have enough time to vary (change) the factors of production so as to increase output but in the short run, supply is inelastic because it is difficult to change the fixed factors of production in order to increase supply.
CATEGORIES Economics
TAGS Dr. Bbosa Science
