Thus, the second bottom diagram elasticity of supply at point A will be equal to unity. Let us now describe the price elasticity of supply using the supply function for a product. The linear supply function for a product is of the following type:.
Rate of the product is r, and m and n are invariables. The invariable co-efficient n denotes the incline of the supply function and indicates how much volume supplied varies supplied of a product enhances as its rates enhances. Determine the elasticity of supply. Which means 1 percent enhancement in rate will tend to 0. We have the best tutors in Economics in the industry. Our tutors can break down a complex Measurement of Elasticity of Supply at a Point on the Supply Curve problem into its sub parts and explain to you in detail how each step is performed.
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Supply Function and Elasticity of Supply Let us now describe the price elasticity of supply using the supply function for a product. The linear supply function for a product is of the following type: Length of Production Period: The law of supply assumes that changes in price will produce an immediate effect in the quantity supplied.
This may be theoretically correct. However, this is not possible in reality for many products. Production is a time and resource consuming process.
Hence, it cannot be scaled up or down with that much ease. In many cases, the time required for production stretches to many months or even years. Hence, there is a lagging effect on supply. This is another important determinant of the elasticity of supply. Products whose production times take longer have relatively inelastic supply compared to those products where the production time is less.
Marginal Cost of Production: The law of supply also assumes that the profitability of the supplier does not change with the number of units sold. That is not the case.
In reality, we have something called the economies of scale and diseconomies of scale. This influences the marginal cost of production. Hence, it may sometimes make economic sense to sell more whereas at other times, it may make more economic sense to sell less! Because producers consider marginal cost of production while making their decisions, it has become an important determinant in the elasticity of supply.
In the short run, the supply of all products is more or less inelastic. This is because there are many factors which producers cannot vary in the short run. However, in the long run, all the factors are variable and hence the supply of all products is completely elastic. Hence companies must be careful while making capital decisions. The above mentioned list of factors is not exhaustive.
However, using the reasoning behind these factors one can easily come up with more and more factors that may determine the price elasticity of supply. Similar Articles Under - Managerial Economics. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link s to ManagementStudyGuide.
Determinants of Price Elasticity of Supply A numeric value that measures the elasticity of a good when the price changes. -availability of materials - The limited availability of raw materials could limit the amount of a product that can be produced.
The higher the mobility of factors, the greater is the elasticity of supply of the good and vice versa. (iv) 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. (v) Excess supply.
This is an important determinant of elasticity of supply. Products where capacity can be easily added and reduced have an elastic supply whereas products where it is difficult to increase or decrease capacity have inelastic demand. A product's supply elasticity is determined by several factors, including the length of time to produce the good, availability of production inputs, ease of storage of the finished product, excess production capacity and mobility of the production factors. Price elasticity of supply indicates the.
The first determinant of price elasticity of supply is the existence of spare capacity. If there is high unit of stock in a company, it is able to respond to the change in demand quickly by supplying the stock to the market without raising the price. The main determinant of elasticity of supply is the amount of time a producer has to respond to a given change in product price (the longer the time, the greater will be the response, and therefore the greater will be the elasticity).