Here the numerical value of elasticity of supply is greater than zero but less than one. The quantity supplied of a commodity will not change if the producers do not react positively to the increase in prices. Written by and last modified on Jun 12, 2018. Opponents of the rate increase contended that the railroad's revenues would fall because of the rate hike. Over a longer period of time, people have more time to adjust to the price change. The availability of close substitutes. I Marginal Cost: Elasticity of supply of a commodity depends on the marginal cost of production.
Determinants of supply are the factors that affect the supply of a product or service and that cause a shift in the supply curve. It will also mean that there will be a delay before those who are willing to take it up are fully qualified to join the labour force. This gives rise to expansion of marginal cost of production. Whereas, if there are no close substitutes for a product, then its demand is said to be inelastic. Number of sellers: More sellers in the market increase the market supply. Increase in resource prices reduces the supply and the supply curve is shifted leftwards whereas decrease in resource prices increases the supply and the supply curve is shifted rightwards.
On the other hand in the long run the supply curve of a commodity is more elastic. Technology rarely deteriorates and it ensures the business remains efficient therefore a constant supply of the goods and services. To quantify such change we require the concept of elasticity of supply that measures the extent of quantities supplied in response to a change in price. Here we will discuss the determinants of supply other than price. This obviously means that supply will remain stagnant for a while when capacity is stagnant and may then increase by leaps and bounds when additional capacity is introduced. Various factors, which determine the elasticity of supply of a product, are given below. In case of manufacturers, when they expect the future price to increase, they will employ more resources to increase their output and this may increase current supply as well.
Lets assume that farmers have got hold of a revolutionary technique with which they can increase productivity two fold. This, in turn, reduces the supply and in the context of manufacturers when there is an expected increase in price then they will employ more resources to increase the output. The profit-maximizing quantity, in turn, depends on a number of different factors. Technology Improvement in technology enables more efficient production of goods and services. It's probably not surprising that an increase in the price of Coke would increase the demand for Pepsi as some consumers switch over from Coke to Pepsi. Modern technology incorporation in business and service delivery enables efficient, and efficacy in the production of goods and delivery of services reduces the overall costs of the final product.
Thus, higher mobility makes the supply elastic. When there is innovation in technology, it leads to efficiency in the production of goods or services. Cars are expensive and a 10% increase in the price of a car may make the difference whether people will choose to buy the car or not. Inputs to production, or factors of production, are things like labor and capital, and all inputs to production come with their own prices. However when the other determinants change, the supply curve is shifted.
Producers do not always increase the quantity supplied of a commodity to a rise in price. Subsidies, on the other hand, reduces the cost of production, and the suppliers can gain profits by selling the product or service An increase in subsidies will increase supply and a decrease in subsidies will decrease supply in the same manner. In the constant cost industry the supply of a commodity is perfectly elastic. So, if the related infrastructure is easily scalable, then the supply of such a product will be highly elastic or else it will be inelastic. Another factor that affects the supply elasticity of a good or a service is the amount of producers.
If the time is longer producers get sufficient time to make adjustment for changing output in response to the change in price. Like price elasticity of demand, price elasticity of supply is also dependent on many factors. Factors affecting production cost are: input prices, wage rate, government regulation and taxes, etc. Technology, in an economic sense, refers to the processes by which inputs are turned into outputs. Such as car and petrol, pen and ink, etc. Moreover, a decrease in the prices of the inputs will increase profits.
Therefore, an increase in price increases the output by a greater factor because a company is able to produce more for a smaller price input. It can be concluded that. In many cases, the time required for production stretches to many months or even years. Increases in technology make it more attractive to produce since technology increases decrease per unit production costs , so increases in technology increase the quantity supplied of a product. There are several factors that affect the supply elasticity of a good or service, such as the availability of resources, innovation of technology and the amount of producers.
This may seem a bit counterintuitive, since it seems like firms might each produce less if they know that there are more firms in the market, but this is not what usually happens in. In the short run, diminishing marginal returns operates as some factors are fixed. Types of Elasticity of Supply : For all the commodities, the value of E s cannot be uniform. Flashcards vary depending on the topic, questions and age group. Some questions will include multiple choice options to show you the options involved and other questions will just have the questions and corrects answers. The greater the possibility of shifting of resources to the potato cultivation, the greater is the elasticity of supply of potato. Subsidies reduce the burden of production costs on suppliers, thus increasing the profits.
Just as with demand, expectations about the future determinants of supply, meaning future prices, future input costs and future technology, often impact how much of a product a firm is willing to supply at present. High taxes reduce profits because the suppliers will have to pay huge bills to cater for their production. As with the rise and fall in their prices, the demand decreases or increases moderately. The burden of any tax is typically shared between consumers and suppliers. Because producers consider marginal cost of production while making their decisions, it has become an important determinant in the elasticity of supply. Thus, when the price of a commodity is relatively high, the producers are likely to be supplying near the limits of their capacity and would, therefore, be unable to make much response to a still higher price.