Answer to Question #319757 in Microeconomics for preeti

Question

. Elaborate the term Elasticity of Supply and explain any three factors that determines elasticity of supply 

Answer 1

The law of supply shows the direction of transition – supply escalates as price rises. However, the law of supply does not indicate how much a rise in supply will be registered in response to an escalation in price. Thus, we need the concept of elasticity of supply to analyze the quantity of such transition. The elasticity of supply evaluates an organization’s ability to raise or lower production due to the price change of a commodity. Various types of elasticity of supply comprise perfectly inelastic supply, perfectly elastic supply, unit elasticity of supply, inelastic supply, and elastic supply.

Factors that influence the elasticity of supply include:

Ease of storage: A company can escalate its elasticity of supply by stockpiling parts or the final product to enable it to respond to price increases effectively. However, this flexibility does not favor companies that manufacture perishable goods.

Availability of inputs: A company whose inputs are readily available is more elastic than a company that has to wait or search for inputs. For instance, a hospital may require months to find and negotiate with an experienced surgeon. On the other hand, a welding services company would hire more workers in a short period since only fewer skills are required. Thus, the hospitals' supply is more inelastic than the welding services company.

Time: Time offers flexibility to respond to market transitions; thus, a long-term supply curve provides more elasticity than a short-term curve.