Marginal Cost if the cost of producing one more unit keeps rising as output rises or Marginal Costs rises rapidly with an increase in output, then the rate of output production will be limited. Over time price elasticity of supply tends to become more elastic, which means that producers would increase the quantity supplied by a larger percentage than an increase in price. The larger the number of firms, the more likely supply is elastic. If factors of production are mobile, then price elasticity of supply tends to be more elastic. If firms have spare capacity, the price elasticity of supply is elastic. They are able to produce more, and quickly with a change in price.
The main factors which determine the degree of price elasticity of supply (Determinants of price elasticity of supply and demand) are as under:
(1) Time period. Time is the most significant factor which affects the elasticity of supply. If the price of a commodity rises and the producers, have enough time to make adjustment in the level of output, the elasticity of supply will be more elastic. If the time period is short and the supply cannot be expanded after a price increase, the supply is relatively inelastic.
(2) Ability to store output. The goods which can be safety stored have relatively elastic supply over the goods which are perishable and do not have storage facilities.
(3) Factor mobility. If the factors of production can be easily moved from one use to another, it will affect elasticity of supply. The higher the mobility of factors, the greater is the elasticity of supply of the good and vice versa.
(4) Changes in marginal cost of production. If with the expansion of output, marginal cost increases and marginal return declines, the price elasticity of supply will be less elastic to that extent.
(5) Excess supply. When there is excess capacity and the producer can increase output easily to take advantage of the rising prices, the supply is more elastic. In case the production is already upto the maximum from the existing resources, the rising prices will not affect supply in the short period. The supply will be more inelastic.
(6) Availability of ,infrastructure facilities. If infrastructure facilities are available for expanding output-of a particular good in response to the rise in prices, the elasticity of supply will be relatively more elastic.
(7) Agricultural or industrial products. In agriculture, time is required to increase output in response to rise in prices of goods. The supply of agricultural goods is fairly inelastic. As regards the supply of manufactured consumer goods, it is comparatively easy- to increase production in a short period. Therefore, the supply of consumer goods is fairly more elastic. In case of supply of aeroplanes or any other heavy machinery, the supply Is relatively inelastic as it takes time to manufacture heavy machinery.
Related Economics Topics
- QUESTIONS ELASTICITY OF DEMAND
- Elasticity Of Supply
- Factors Determining Price Elasticity Of Demand
- The Applications of Derivatives to the concepts of Elasticity of Demand and Supply
- DEGREES OF PRICE ELASTICITY OF DEMAND