Price elasticity of supply is a measurement of the
responsiveness of the quantity supplied to a change in the price of the good.
It
is measured by the following formula;
Elasticity
of Supply PES = % Change in quantity
supplied / % Change in price
Elasticity of supply depends upon the flexibility or
mobility of the factors of production.
Therefore production capacity of firms plays an important role in
determining PES. Price elasticity of supply is very important for
decisions regarding production.
The
determinants of price elasticity of
supply are
(1)
Effect on cost structure of an increase
in supply. If the firm is able to increase its output without increasing
its cost of production the Price elasticity of supply would be elastic. So
production capacity of firm plays an important role in determining Price
elasticity of supply.
(2)
Time span –
(i)
in momentary run suppliers would
not be able to change its supply and hence the supply is inelastic.
(ii)
In short run, if the firm could
increase the output by increasing the variable input, more could be supplied to
the market hence it is elastic – but supply of large amount is limited.
(iii)
In long run firms would be able
to make change both in variable and fixed input, hence supply would be highly
elastic.
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