Elasticity of Supply? What are its determinants and how it’s measured
Degree of
responsiveness in the quality supplied due to a given change in price is known
as elasticity of supply, when a small rise in price brings about a greater
change in supply (both extension or contraction) it is said, that supply is
elastic on the other hand when a greater change in price results a smaller
change in supply, the supply is said to be inelastic.
1. Perishable goods like fruit and
vegetables have low elasticity of supply while the stable goods like cloth and
shoes have high elasticity.
2. Goods produced at higher cost of
production like machinery and car always have a low elasticity. Supply of such goods
cannot be increased even at higher prices.
3. Nature dominated sectors agriculture
always have a low elasticity while the sectors where man plays the vital and
dominant role, the elasticity is quite high there.
4. In case where technique of production
is quite complicated, extension there is not so easy whereas in the simple
technique supply can be extended and contracted very easily and thus the
elasticity is high.
5. Goods produced under the law of
increasing return command high elasticity where as the operation of the law of
decreasing return does not allow free extension and thus the elasticity is low.
6. Goods which can be easily and quickly
made tend to have elastic supply and where fairly long time is required the
elasticity is low.
Determinants of
Elasticity of Supply
If due to full
utilization of the internal and external economies the cost falls the supply
will rise as it is profitable for producers to increase the supply. The supply
decreases when the cost rises.
If due to
innovations, research and experiments, some new technology is evolved which
causes the reduction in cost, the supply will definitely increase. In the
reverse case the supply will decrease.
Any discovery of
raw material or the improvement and development in the means of transport and
communication will surely causes the increase in supply while in the opposite
case supply decreases.
Monetary,
fiscal, commercial, income and price policies of government not only regulate
the economy but also accelerate the pace of economic development. It
consequently increases Gross National Product (GNP) and raises the level of
employment and standard of living of people.
Stable political
conditions, maintenance of internal law and order and security against foreign
aggression set the stone rolling and bring about great change in the supply
market.
Measurement of
Elasticity of Supply
Like demand, the
elasticity of supply can be measured in terms of unity.
(i) Equal to
Unity: If the percentage in price is equal to the percentage change in supply,
the elasticity of supply is said to be equal to unity.
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