Elasticity Of Supply

Elasticity Of Supply

Elasticity of supply reflects the ease or difficulty of changing the volume of production. If, as price rises and production expands, the quantity of some factors of production is fixed, increased production will require available factors to be substituted for the fixed factors. The cost per unit of output will thud to rise, the rise being larger the less easily the factors can be substituted for one another. The swifter the rise in costs the smaller will be the increase in output in response to a price rise. Substitution will become easier the more time there is in which to adapt productive methods and to allow new firms to enter production. Normally, therefore, elasticity of supply increases with time.

Elasticity of supply is usually lower for downward changes in prices than for upward changes where overhead costs represent a large proportion of total cost of production, because output will tend to be maintained in the face of a fall in price so long as revenue is slightly more than sufficient to cover prime costs, i.e. payments for labour and raw material, and there is some contribution, however small, towards overhead costs so that profits are higher or losses smaller than if production were curtailed.

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