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Factors that Affect Elasticity of Supply

Factors that Affect Elasticity of Supply
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  • 0:00 What Is Elasticity?
  • 0:25 Factors Of Elasticity…
  • 4:50 Lesson Summary
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Lesson Transcript
Instructor: Beth Loy

Dr. Loy has a Ph.D. in Resource Economics; master's degrees in economics, human resources, and safety; and has taught masters and doctorate level courses in statistics, research methods, economics, and management.

This lesson discusses and provides examples of the factors that affect the elasticity of supply, such as stocking capacity and production costs. Read on to learn more about these and other elasticity of supply factors, then take a brief quiz.

What is Elasticity?

An important part of understanding an economy is learning how the supply and demand of a good or service (an output) reacts to key economic factors. Perhaps the best way to understand these interactions is to measure elasticity. Elasticity is the responsiveness of consumers and producers to changes in the price of a good or service. How fast supply changes with price depends on this elasticity.

Factors of Elasticity of Supply

When the price of a good or service increases, it's expected there will be changes in supply. After all, companies seek to increase profit, so they're likely to respond by increasing the output in an effort to make greater profit. This reaction, measured by elasticity, is affected by several factors. Let's review those factors and look at examples of each:

1) Time to produce: The amount of time it takes producers to respond to price changes is extremely important to the elasticity of supply. If the price of an output increases, and producers have time to adjust supply, supply will be more elastic. If producers are unable to respond to the price increase, the supply is inelastic. In the short-run, supply may be inelastic. However, given more time to respond, elasticity of supply may increase.

  • For example, say that the price of pumpkins increases due to a popular pumpkin diet. Supply is going to be inelastic at first because it takes a great deal of time to grow more pumpkins. In the short-run, supply is inelastic, but over the long-run, supply becomes more elastic as farmers eventually produce more pumpkins.

2) Availability of scarce resources: If an economy is using the majority of its scarce resources, businesses will not be able to increase production, and supply will remain stagnant. Supply, in this instance, will be inelastic--unaffected by changes in price.

  • Let's say that the price of cinnamon buns increases due to a newly published article discussing their health benefits. But what if cinnamon is scarce? Businesses will not be able to increase the supply of cinnamon buns as quickly because one of the inputs is scarce. In this case, supply is inelastic. If cinnamon was readily available, supply might be elastic.

3) Number of producers: The more producers available to produce an output, the easier supply can be increased. Supply becomes more elastic as the number of producers increases.

  • For instance, imagine that the price of pasta increases due to a popular pasta diet. The more producers who are available to respond to an increase in supply, the more elastic supply becomes because it takes less time to supply more pasta.

4) Stocking capacity: When producers have the ability to stock excess supply, they can respond more quickly to price increases. In this case, the supply is more elastic. If producers do not have this ability, the supply will be less elastic.

  • For example, say the price of beef has been low for several months. If a beef farmer has the room to house cattle until the price of beef increases, the supply of beef will be more elastic. Suppliers simply dip into what they have stocked. When a farmer does not have the ability to house cattle, there is no way to stock the cows until the price of beef increases again. In this case, supply is inelastic.

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