Question

Explain any three factors affecting elasticity of supply.

Answer 1

It is now time to discuss the important factors that determine whether the supply of a commodity is elastic or inelastic. Price elasticity of supply depends on the following factors.

1. Length of Time: Price elasticity of supply also depends upon the length of time for response. It may be difficult to change quantities supplied in a few weeks or months in response to a price change but easy to do so over a period of a year. Therefore, supply tends to be relatively inelastic in the short run and relatively elastic in the long run.
2. Cost of Production: Supply elasticity is greatly influenced by how production costs respond to output changes. If an increase in output by the firms in an industry causes only a slight increase in their cost per unit or leads to a decrease in cost per unit, supply will be fairly elastic. If, on the other hand, an increase in supply leads to a large increase in the cost of production, the supply would be relatively inelastic.
3. Risk-taking: The elasticity of supply is determined by entrepreneurs' willingness to take risks. If entrepreneurs are willing to take risks, the supply will be more elastic. On the other hand, if entrepreneurs hesitate to take risks, the supply will be inelastic.