Determinants of Price Elasticity of Supply

Which one of the following factors do you think has the biggest influence on the price elasticity of supply of a product?

  • The demand for the product
  • Time period
  • Expected future price

It is time. The more time is available and the greater the number of opportunities to change, the more elastic supply will be.

Time period

The passing of time is the main determinant of price elasticity of supply and most of the other determinants of price elasticity of supply can be linked to time. In the short run, suppliers do not have the time to respond quickly to price changes and the price elasticity of supply tends to be more inelastic. However, in the long run, producers have time to change production techniques or increase production capacity, so the price elasticity of supply becomes more elastic.

Expected prices

If producers see the change, say, in price, as a temporary occurrence, they will not change or increase the production of the product in question and the price elasticity of supply will be inelastic. But, if they expect prices to remain high, they will increase production and the price elasticity of supply will be more elastic.

Labour-intensive versus capital-intensive production processes

It is easier to expand the production of machine-made goods than the production of goods that are labour intensive. It takes time to recruit and train more workers if you wish to increase the production of a product that is labour intensive. However, capital-intensive production processes that use a lot of machines usually have excess capacity and can therefore quickly increase production should it be required. The price elasticity of the supply of labour-intensive products is more inelastic than machine-intensive products.

Agricultural products

Lastly, the price elasticity of supply of agricultural products, which tend to be perishable, is more inelastic than goods that can be stored – stockpiled goods can be released quickly to the market.