Question

Word count for question 1500

Discuss the determinants of price elasticity of supply. Besides knowing the price
elasticity of supply, why it is important for a seller to understand the price elasticity
of demand of its product?

Answer 1

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Introduction

There are so many determinants that define the price elasticity of supply and it is very necessary for seller to understand the price elasticity of demand of its product also. Price elasticity of supply is depend on time that consumers take to adjust themselves with new prices of a product. The longer the period of time, higher the price elasticity of demand. This is due to the fact that over a period of time, consumers get adjusted to change in prices or new prices

Abstract

A) Determinants of price elasticity of supply

There are numerous factors that directly impact the elasticity of supply for a good including stock, time period, availability of substitutes, and spare capacity. The state of these factors for a particular good will determine if the price elasticity of supply is elastic or inelastic in regards to a change in price.

The price elasticity of supply is determined by:

• Number of producers: ease of entry into the market.
• Spare capacity: it is easy to increase production if there is a shift in demand.
• Ease of switching: if production of goods can be varied, supply is more elastic.
• Ease of storage: when goods can be stored easily, the elastic response increases demand.
• Length of production period: quick production responds to a price increase easier.
• Time period of training: when a firm invests in capital the supply is more elastic in its response to price increases.
• Factor mobility: when moving resources into the industry is easier, the supply curve in more elastic.
• Reaction of costs: if costs rise slowly it will stimulate an increase in quantity supplied. If cost rise rapidly the stimulus to production will be choked off quickly.

B) From Seller point of view : Importance to know the price elasticity of demand of its product

1. Price elasticity helps sellers to understand how changes in price of a product will impact the total sales of the product. This insight helps the managers to determine the prices of different products that will yield maximum profit for their businesses.
2. Price elasticity of demand refers to the relationship between the price of a product and the quantity of the product that is demanded by consumers.
3. A product's demand is said to be elastic if, when the price goes up, revenues go down. If the price goes up and revenues go up, then demand is inelastic.
4. For a Seller, this is very important information. If a manager knows the elasticity of the demand for his firm's product, he will be able to know whether to raise or lower prices. This is surely a very important decision for any manager to make.

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