In the words of Thomas, “The supply of a commodity is said to be elastic when as a result of change in price, the supply changes sufficiently as to quick response.
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On the contrary, if there is no change or negligible change in supply or supply pays no response it is inelastic”. Elasticity of supply depends upon a number of factors some of which are as follows.
(1) Nature of Commodity:
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It is the first and foremost determinant of the elasticity of supply. On the basis of the nature, commodities may be classified as (i) perishable, and (ii) durable. Perishable goods cannot be stored and, thus, entire stock of such goods must be disposed of within a very short period, whatever may be the price. Otherwise, they might get rotten.
Hence, their supply is inelastic in nature. The supply of agricultural commodities is also inelastic, as the supply of land is relatively fixed. Durable goods, on the other hand, can be stored and their supply responds to the changes in their price. Thus, their supply is generally elastic.
(2) Behaviour of Costs as Output Varies (Stage of Law of Returns):
Total cost rises at a falling rate in the beginning, then at a constant rate and finally at a rising rate. This is corresponding to increasing, constant and diminishing returns to a factor. If total cost rises at falling rate, there is more stimulus to expand output in response to rise in price and accordingly, supply will tend to be more elastic. On the other hand, if total cost rises at rapid rate, supply will be less elastic.
(3) Period of Production:
Supply of a commodity comes from its production, which involves a time lag. In a market period, the supply of a commodity is highly inelastic, as size of the plant is given and adjustments in terms of technology and factor of production etc are not possible in this very short period. In a short period, the supply of a commodity tends to be relatively elastic, as the firm has an excess capacity and can change some of the factors.
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But, in the long period, all the factors and the size of the plant can be changed and technological changes are also possible. A firm can adjust fully to changes in price. Hence, supply is more elastic or the supply curve becomes flatter.
(4) Techniques of Production:
Simple techniques of production are by and large expensive in nature. In such case, the production and supply of commodities can be easily increased. Thus, supply of such commodities is generally elastic in nature.
On the other hand, if the technique of production of a commodity is complex and time consuming, it may not be possible to change the supply in response to change in price. Supply of such commodities would generally be less elastic.
(5) Future Price Expectations:
If the producers expect that the prices will rise in future, they may hoard the stock and may supply fewer quantities in the market. Supply in such a case will be inelastic. On the other hand, if the prices are expected to fall in the future, supply will be more elastic.
(6) Number of Products Produced by an Industrial Unit:
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If an industrial unit produces a large number of products, the supply of any one of them will be relatively elastic, as with a slight rise in the price of any commodity, resources may be transferred to the production of that commodity and vice-versa.
(7) Production Capacity (Limited Supply of Inputs):
The extent to which the producers would raise supply of their commodities depends on the availability of productive capacities and inputs required for the production of these commodities. Resource based industries such as oil, metal, chemicals, etc., often face this situation.
The producers would not be able to raise the supplies of these resources in response to the rise in the prices. When they need more of these inputs, they might be required to offer steeply high prices to bid the inputs away from other uses.
Alternatively, they might have to carry out drastic changes in the production process that too involves heavy cost. Consequently, the supply curve for such commodities will be relatively inelastic making the availability of the output only at highly increased prices. On the other hand, unlimited production capacity results in elasticity supply due to possibility of increased production.