The price Elasticity of Supply and Its Determinants

The law of supply states that higher prices raise the quantity supplied. The price elasticity of supply measures how much the quantity supplied responds to changes in the price. Supply of a good is said to be elastic the quantity supplied responds substantially to change in the price. Supply is said to be inelastic if the quantity supplied responds only slightly to change in the price.

The price elasticity of supply depends on the flexibility of sellers to change the amount of the good they produce. For example beachfront land has an inelastic supply because it is almost impossible to produce more of it. By contrast manufactured goods such as books cars and and televisions have elastic supplies because firms that produce them can run their factories longer in response to a higher price.

In most markets a key determinant of the price elasticity of supply is the time period being considered. Supply is usually more elastic in the long ecu than in the short run. Over short periods of time firms cannot easily change the size of their factories to make more ores of a good. Thus in the short run the quantity supplied in not very responsive to the price. By contrast over longer periods firms can build new factories or close old ones. In addition new firms can supplied can respond substantially to price change

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