Question

Explain the factors affecting the elasticity of supply and derive the formula of elasticity of supply

Answer 1

Factors affecting price elasticity of supply are:

1. Nature of the commodity
(a) Perishable goods. like vegetables fruits at cetera which cannot be stored and does these are relatively less elastic in supply.
(b) Durable goods. like furniture TV excetra have elastic supply as they can be stored and the supplier can respond according to change in their prices.

2. Time period
There are three types of period:
(a) Market Period or very short period
(b) Short Period
(c) Long Period

3. Technique of Production
Goods having simple technique and complex technique of production have elastic and inelastic supply respectively.

4. Cost of Production
If production is subject to law of diminishing cost and law of increasing cost supply will be elastic and less elastic respectively.

5. Risk taking
The elasticity of supply depends upon the willingness of entrepreneur to take risk.

6. Natural Constraints
(a) The production of a commodity which is influenced by natural constraints has inelastic supply.
(b) Goods which do not have natural constraints will have elastic supply.

Answer 2

Answer:

The following points are factors affecting price elasticity of supply.

Factor # 1. The Nature of the Industry:

The most important factor of affecting price elasticity of the supply in the nature of the industry under consideration.  

This will indicate the extent to which the production can be increased in response to an increase in the price of the product. If inputs (especially raw materials) can be easily found the existing market prices, as in the textile industry, then the output can be greatly increased if the price rises slightly.

Factor # 2. Nature Constraints:

The nature of world also places restrictions upon the  supply. Rubber trees, for example, take 15 years to grow. So it is not possible to increase the supply of rubber overnight.

Factor # 3. Risk-Taking:

The willingness of the entre­-preneurs to take risks also the  affects of  price elasticity of supply. This, in its turn, depends on the system of incentives and disincentives. If, for example, the marginal rates of tax are very high, a price rise will not evoke much response among producers.

the more accurate the  way to compute the price elasticity of supply; the formula divides the change in quantity supplied and the price by their average values

(Qs2 – Qs1)/[(Qs2+Qs1)/2] and (P2 – P1)/[(P2+P1)/2].

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