The different factors affecting price elasticity

Some of the major factors affecting the elasticity of demand of a commodity are as follows:

The different factors affecting price elasticity

The Nature of the Industry: The most important factor affecting price elasticity of supply in the nature of the industry under consideration. This will indicate the extent to which production can be increased in response to an increase in the price of the product.

If inputs especially raw materials can be easily found existing market prices, as in the textile industry, then output can be greatly increased if price rises slightly. This means that supply is fairly elastic in the textile industry. On the other hand, if production capacity is severely limited, as in gold mines, then even a very large increase in price of gold will lead to a very small increase in production.

This means that the supply of gold is fairly inelastic. The nature world also places restrictions upon supply.

Rubber trees, for example, take 15 years to grow. So it is not possible to increase the supply of rubber overnight. This, in its turn, depends on the system of incentives and disincentives. If, for example, the marginal rates of tax are very high, a price rise will not evoke much response among producers.

The Nature of the Good: As with demand elasticity, the most important determinant of elasticity of supply is the availability of substitutes. In the context of supply, substitute goods are those to which factors of production can most easily be transferred.

For example, a farmer can easily move from growing wheat to producing jute.

The different factors affecting price elasticity

Of course, mobility of factors is very important for such substitution. As a general rule, the more easily factors can be transferred from the production of one good to that of another, the greater the elasticity of supply.

Income Level

The Definition of the Commodity: As in the case of demand, elasticity of supply also depends on the definition of the commodity. The narrowly a commodity is defined, the greater its elasticity of supply.

Time also exerts considerable influence on the elasticity of supply. Supply is more elastic in the long run than in the short run. The reason is easy to find out. The longer the time period the easier it is to shift resources among products, following a change in their relative prices.

Business firms may find it difficult to increase their usage of labour and output immediately after price rise.

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So supply is likely to be less elastic. However, with the passage of time, business firms can hire more labour, capital and set up new factories so as to expand production capacity.

Thus supply will increase considerably. So supply will be more elastic in the long run than in the short run because producers take some time to adjust their capacity to changes in demand.

Alfred Marshall referred to three time period in this context, viz. In the momentary period supply is fixed and Es is zero.

In the short run, supply can be varied by using existing machines and factories more intensively.These factors include price, income level and availability of substitutes. Price One factor that can affect demand elasticity of a good or service is its price level.

Price Elasticity of Supply and the Factors Affecting It. Print Reference this. Disclaimer: This work has been submitted by a student. This is not an example of the work written by our professional academic writers. Supply curves with different price elasticity of supply. Factors affecting price elasticity of demand.

The number of close substitutes – the more close substitutes there are in the market, the more elastic is demand because consumers find it easy to switch. The cost of switching between products – there may be costs involved in switching.

A good has a high price elasticity of supply if the quantity supplied changes a great deal when the price of the good changes. There are some factors which affect the PES. The elasticity of supply measures the percentage change in supply due to a change in another factor.

It refers to how the amount supplied of a good or service changes in response to a price or. Aug 10,  · Best Answer.- abundance in substitute-goods: the presence of abundance in substitute-goods make the customer let to purchase it and it will demand the substitute-goodsm More abundance means more elasticity.- presence of barriers to quick change in prices; in some countries there is regulation for price of milk, no matter the situation of markets, the price must allignent to regulations Status: Resolved.

9 Major Factors which Affects the Elasticity of Demand of a Commodity | Economics