Question

What is the main determinant of the price elasticity of supply?

Short answer

The main determinant of the price elasticity of supply is the 'Time period'. The longer the producer has to respond to price changes, the more elastic the supply becomes.

Step-by-step solution

Define the price elasticity of supply

The price elasticity of supply is a measure used in economics to show the responsiveness, or elasticity, of the quantity supplied of a good or service to a change in its price. Mathematically, it can be represented as \(\frac{\% \Delta Qs}{\% \Delta P}\), where \(Qs\) is the quantity supplied and \(P\) is the price.

Understand the factors that determine price elasticity of supply

Several factors can influence the price elasticity of supply: (i) The availability of materials - if the resources used to produce a good are readily available, then the supply can respond quickly to price changes, (ii) The time period - it is easier to change the supply in the long run than in the short run, (iii) The ability to store goods - if goods can easily be stored, then suppliers can adjust their supply quickly in response to price changes.

Identify the main determinant

Given these factors, it is safe to say that the 'Time period' is the main determinant of the price elasticity of supply. The longer the time period considered for a supply decision, the greater the elasticity of supply, as suppliers have more time to respond to price changes. In the short-run, the elasticity of supply is likely to be less as production capacities are fixed.

Key concepts

Determinants of Supply

The price elasticity of supply is mainly determined by several key factors. Understanding these determinants will help us figure out how easily the quantity supplied can respond to changes in price. The three major determinants include:

• The availability of materials: If the resources needed to produce a good are plentiful and easily accessible, suppliers can respond to price changes more flexibly. For example, if there's a lot of raw material available, producers can increase output quickly.


• The ability to store goods: When goods can be stored without deteriorating, suppliers have the opportunity to adjust how much they supply based on price changes. This ability provides a buffer, allowing producers to manage their stock according to current market conditions.


• The time period: In the short run, production capabilities and the amount suppliers can provide are often limited. However, over the long run, suppliers can expand capacity, adjust labor and convert resources more effectively to respond to pricing. Therefore, more time allows for greater flexibility and responsiveness in supply.

Recognizing these determinants can deepen your understanding of how supply changes in relation to market forces.

Economic Responsiveness

Economic responsiveness refers to how sensitive the supply of a good or service is to changes in its market price. The concept is central in understanding the dynamics of supply and demand in economics.

• When supply is highly elastic, a small change in price results in a significant change in the quantity supplied. Suppliers are quick to adjust their production levels in response to price changes.


• Inelastic supply indicates that quantity supplied doesn't change much with price fluctuations. This often happens when production requires specialized resources or when time to adjust production is lacking.

This concept helps to foresee how market changes can impact supply and guides businesses in planning production strategies effectively. Understanding the responsiveness of supply to price changes can aid in making informed economic decisions.

Time Period Elasticity

One of the most significant factors affecting the price elasticity of supply is the time period considered.

• In the short run, firms have limited ability to change production levels. Factors of production, such as capital and labor, are usually fixed, leading to a relatively inelastic supply. For instance, a bakery might not be able to bake more bread instantly because ovens are already operating at full capacity.


• Conversely, the long run presents a different scenario as firms can adjust all production factors. They can expand facilities, retrieve new technology, or hire more workers, leading to a more elastic supply. Over time, this flexibility allows firms to adapt to price changes more easily.

The main takeaway is that the elasticity of supply is considerably more flexible in the long term compared to the short term. The increased ability to adjust outputs over time results in a higher responsiveness of supply to price changes.