5 DETERMINANTS OF PRICE ELASTICITY OF SUPPLY

Price elasticity of supply can be defined as a measure of the responsiveness of quantity supplied to changes in prices.

Price elasticity of supply is influenced by various factors including: 

1. Time scale: This is the period that a firm is required to adjust its production input in response to price changes

In the short run, firms have fixed input which cannot be easily changed. Hence, supply is less elastic.

In the long run, however, when all inputs are variable, firms may quickly adapt to price changes, resulting in a more elastic supply.

In short, supply tends to be less elastic In the short run than in the long run. 

2. Barriers to entry: These are technological and legal factors that can prevent a firm from entering a market.

If there are no barriers to entry into a market, supply will be more elastic because a price increase would cause more firms to enter the market, which will increase market output.

Conversely, if there are high barriers to entry, supply will be more inelastic because no new firm can enter the market.

The result is that quantity supplied will rise relatively smaller to changes in price.

3. Nature of the goods: This is another major determinant of price elasticity of supply.

Durable goods tend to have an elastic supply because they can be stored if the price falls.

Perishable goods, on the other hand, are goods that cannot be stored because they are perishable.

Perishable goods have an inelastic supply because they cannot be stored should the first price falls.

4. Ability to price discriminate: Price discrimination occurs when the same goods and services are sold to different people at different prices.

If a firm produces goods that can be sold in different markets and at different prices, then supply will be elastic because the firm can move to another market should the price fall.

Conversely, if a firm sells goods that cannot be sold at different prices and in different markets, then supply will be inelastic, as the form cannot move to another when the price falls.

5. Mobility of factors of production: If factors inputs are mobile, the price elasticity of supply tends to be elastic.

This is because firms will easily transfer the factor inputs to the production of other substitutes should the price of the goods falls.

By the same reasoning, supply will be elastic if factors inputs are immobile.

READ ALSO: 5 DETERMINANTS OF PRICE ELASTICITY OF DEMAND

To conclude, the determinants of price elasticity of supply are time scale, barriers to entry, nature of goods, ability to price discriminate and mobility of factors of production.

Enjoying your read? Subscribe to our newsletter so you could get updated when we publish a new post.

Help us grow our readership by sharing this post

Related Posts

Post a Comment

Subscribe Our Newsletter