The Major Factors That Affect Elasticity of Supply

  

Date Posted: 6/16/2012 7:45:27 AM

Posted By: itakuaje  Membership Level: Bronze  Total Points: 45

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1. The adjustment time: Given that it takes time for firms to adjust the quantities they produce, the supply is likely to be more elastic the longer the period of time under consideration. In the momentary period, supply cannot be increased even if there is a substantial rise in price. In the short-run, supply can be increased by employing more variable factors of production. This is because in the long-run, the quantities of all factors of production can be increased.

2. The availability of spare capacity: If fixed factors of production are being used to the fullest extent, however great the increase in price, the supply will be inelastic. If however, a firm is operating below capacity and there are unemployed resources, supply will be elastic.

3. The level of unsold stocks: If suppliers are holding large stocks, supply will be elastic and an increase in demand can be met by running down stocks. If on the other hand stocks are depleted it may be difficult to increase output and supply will then be inelastic. It follows therefore that the higher the level of unsold stocks the more elastic will be the supply.

4. The ease with which resources can be shifted from one industry to another, that is, factor mobility: in both the short and long run, in the absence of excess capacity and unsold stocks, an increase in supply necessitates the shifting of factors of production from one use to another. This may be costly because the prices of factors may have to be raised to attract them to move and because of barriers to the mobility of labour.

5. The availability of variable factors of production: If variable factors of production are not easily available, then supply will be inelastic even if the firm has spare capacity in its

fixed factors of production. A firm should be able to employ variable factors of production easily and combine these with spare fixed factors that are available before the supply becomes elastic.

(b) Elasticity of supply for agricultural products is low due to:

(i) Perishable nature of products – most agricultural products are perishable and cannot therefore be stored for long and especially since storage facilities would be very expensive to establish and maintain.
(ii) Gestation period (the period between planting and harvest) – once planted, agricultural products take time to mature and become ready for harvest; thus supply tends to be relatively inelastic during this period in that the quantity of a product cannot be increased.
(iii) In-elasticity of demand – Since agricultural products are used in small quantities as inputs
(raw materials) in manufacturing processes, they are purchased in small quantities; thus
production may not always be sufficient to achieve the required periodic level of supply.

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