Main influences on whether supply is elastic or inelastic

Price Elasticity of Supply (PES)

Definition

The price elasticity of supply measures how responsive the quantity supplied of a good is to a change in its price. It is calculated as

\$E_s = \frac{\%\ \text{change in quantity supplied}}{\%\ \text{change in price}}\$

Interpretation:

• If E_s > 1, supply is elastic – producers respond strongly to price changes.
• If E_s = 1, supply is unit‑elastic – percentage change in quantity supplied equals the percentage change in price.
• If E_s < 1, supply is inelastic – producers respond only weakly to price changes.

Main influences on whether supply is elastic or inelastic

1. Time period

   • Short‑run: firms have limited ability to change production levels → supply tends to be inelastic.
   • Long‑run: firms can adjust plant size, enter or exit the market → supply becomes more elastic.

2. Availability of inputs

   • Readily available inputs (e.g., raw materials in a well‑stocked market) make it easier to increase output → more elastic supply.
   • Scarce or specialised inputs (e.g., rare minerals) restrict output adjustments → more inelastic supply.

3. Mobility of factors of production

   • Highly mobile labour and capital can be reallocated quickly → elastic supply.
   • Immobilised factors (e.g., fixed land, specialised machinery) limit responsiveness → inelastic supply.

4. Spare capacity

   • Firms operating below capacity can increase output without major cost increases → elastic supply.
   • Firms already at full capacity need to invest in new facilities to raise output → inelastic supply.

5. Nature of the good

   • Perishable goods or those produced in large batches (e.g., agricultural crops) often have inelastic supply in the short run.
   • Standardised, easily produced goods (e.g., manufactured electronics) tend to have more elastic supply.

6. Regulatory and institutional factors

   • Licences, quotas, or strict environmental regulations can constrain output changes → inelastic supply.
   • Liberal trade policies and low entry barriers facilitate rapid adjustments → elastic supply.

Summary Table