Question

Define price elasticity of supply. Discuss any four determinants of price elasticity of supply.

Answer 1

price elasticity of supply is measure of the responsiveness in quantity supplied to a change in price for a specific good. supply elasticity measures that how change in quantity will be affected in response to change in the price of given goods.

there are no of determinants of price elasticity of supply.

(i) Time period. Time 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. otherwise the supply is relatively inelastic.

(ii) Factor mobility. If the factors of production can be easily moved from one use to another, then the higher the mobility of factors, the greater is the elasticity of supply of the good and vice versa.

(iii) 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 and vice versa.

(iv) 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.

(V) government policy and tax structure also affect the supply of goods and services and price elasticity because they would help in producing more or less goods and accordingly price will be affected. apart more strict tax policy will increase the price and decrease the supply of goods and vice versa.