Elasticity of supply plays a very important role in determining prices of products. The extent of rise in price of a commodity depends on the elasticity of supply. Various factors, which determine the elasticity of supply of a product, are given below.
(I) Marginal Cost:
Elasticity of supply of a commodity depends on the marginal cost of production. The elasticity of supply of a commodity would be less if the marginal cost of production goes up. In the short run, diminishing marginal returns operates as some factors are fixed. This gives rise to expansion of marginal cost of production.
The expansion of marginal cost causes the elasticity of supply in the short run less elastic. On the other hand in the long run the supply curve of a commodity is more elastic. In the increasing cost industry the supply of a commodity is more elastic. In the constant cost industry the supply of a commodity is perfectly elastic. In the decreasing cost industry the supply curve slopes negatively.
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(2) Producers response:
The elasticity of supply for a product depends on the producers’ responsiveness to the change in its price. The quantity supplied of a commodity will not change if the producers do not react positively to the increase in prices. Producers do not always increase the quantity supplied of a commodity to a rise in price.
He may not raise supply in response to the rise in price. In some developed countries agricultural producers meet their fixed money income by selling smaller quantities of food grain. Thus with further rise in price they produce and sell smaller quantities rather that more.
(3) Infrastructural facilities:
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The expansion of supply of a commodity also depends on the availability of productive facilities and inputs. The agricultural producer can not increase in response to the rise in price unless there is sufficient flow of fertilizers, irrigation etc. In case of industrial goods the expansion of supply is inhibited by the shortage of power, fuel and the essential raw materials.
(4) Possibility of Substitution:
The change in supply in response to the change in price depends on the possibility of substitution of a product for others. If the market price of potato rises, resources will be shifted from there cultivation like tomato and employed in the cultivation of potato. The greater the possibility of shifting of resources to the potato cultivation, the greater is the elasticity of supply of potato.
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(5) Duration of time:
The elasticity of a product also depends on the length of time. If the time is longer producers get sufficient time to make adjustment for changing output in response to the change in price. The greater the reaction of output, the greater the elasticity of supply.
On the basis of time market is divided into three types, (i) Market period (ii) Short-run (iii) long-run. In the market period the supply is perfectly inelastic as there is no more production. In the short run, output can be changed by changing the variable factors only. Thus during short period the supply is elastic. In the long run supply of a commodity is more elastic as the firms can adjust all factors of production and also new firms can enter or leave the industry.