What is Price Elasticity of Supply?
The price elasticity of supply of goods quantifies the receptiveness of quantity supplied to changes in the cost price of the commodity. Specifically, the cost price elasticity of supply is denoted by eS, is defined as follow:
Price elasticity of supply, eS = Percentage change in quantity supplied / Percentage change in price
AQ/Q X 100 Divided by AP/P X 100 = AQ/Q X P/∆P
Where ∆Q is the change in the quantity of the commodity supplied to the market place as market cost price changes by ∆P.
Factors Affecting Price Elasticity of Supply
- Nature of the Industry: The most significant aspect influencing price elasticity of supply in the nature of the production under contemplation. This will stipulate the extent to which production can be raised in reaction or response to an increase in the cost price of the good.
- Nature Constraints: Nature also places constraints upon supply. Red maple trees, for instance, take 15 years to grow. So it is impossible to raise the supply of red maple overnight.
- The Nature of the commodity: As with demand elasticity, the most significant feature of elasticity of supply is the obtainability of alternatives. In the context of the supply, alternative commodities are those to which factors of manufacturing can be transferred most easily.
- The Definition of the good: As in the case of demand, the elasticity of supply also relies upon the definition of the good. The commodity is defined as the greater its elasticity of supply. For instance, it is easier for a tailor to transfer resources from manufacturing yellow skirts to blue skirts than from skirts to men’s pants.
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