Jul 05, 2011 | Post by: Prateek Agarwal No Comments

Determinants of Price Elasticity of Supply

What makes Price Elasticity of Supply Inelastic or Elastic?

1. Marginal Cost (which is the increase in cost by producing one more unit) – 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, i.e. Price Elasticity of Supply will be inelastic, which basically means that the percentage of quantity supplied changes less than the change in price. If Marginal Cost rises slowly, then supply will be elastic.

2. 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.

3. The larger the number of firms, the more likely supply is elastic.

4. If factors of production are mobile, then price elasticity of supply tends to be more elastic.

5. 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.

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