What Factors Influence a Change in Supply Elasticity?

Elasticity is a key concept in economics. It measures how sensitive one variable is when one or more variables change. Elasticity generally refers to how consumer demand for a good or service is affected when certain variables rise and drop, such as price or income.

When elasticity is greater than 1, demand tends to be more sensitive. Conversely, demand is inelastic when the value of elasticity is less than 1. This means that demand remains the same regardless of changes in any other variable.

Elasticity can be categorized in several forms, including price, demand, and supply. These types can be affected by various factors. In this article, we examine some of the things that can impact the elasticity of supply

What Is Supply Elasticity?

Supply elasticity is a measure of the responsiveness of an industry or a producer to changes in demand for its product. Put simply, it measures a producer's ability to effectively cope with changes in demand. Several factors can affect the elasticity of supply. They include:

• Price: Producers tend to cut prices when supplies are abundant. On the other hand, prices tend to rise when supplies of goods and services are scarce.
• Availability of Resources: If a company depends on an increasingly scarce resource to produce its product, it may be unable to step up production when demand increases. Moreover, the resource will become increasingly expensive, forcing a corresponding increase in the producer's price, or decrease in its production, or both.
• Technology and Innovation: More efficient production reduces costs and allows for larger production numbers at lower prices.
• Competition: An increase in the number of suppliers makes the price of a product or service more elastic. If one supplier can't meet demand, others will rush to fill the gap.
  

Let's take a look at these factors in a little more detail.

Price

One of the main factors that affect changes in supply elasticity is price. If supply is elastic, so is price. A greater supply of a product or service reduces its cost. A scarcer supply forces prices up.

This relationship can be calculated by measuring the percentage change in supply and the percentage change in its price from one period to the next. Dividing the change in supply by the change in price results in a numerical value. If that number is more than one, the product shows price elasticity. If it is less than one, the product is inelastic.

Consider the price of gasoline, which is elastic. Consumers must buy it regardless of its price. Its supply is also elastic. As such, the industry will generally increase production to meet demand. Consumers felt the pinch when Russia invaded Ukraine. Crude oil prices jumped to as high as $110 per barrel in March 2022 as Russia cut supplies in response to economic sanctions. Gas prices averaged $3.95 per gallon in the U.S. in 2022, which was an increase of more than 31% from the previous year.

Availability of Resources

Inputs can have a major impact on the supply elasticity. These include things like labor, raw materials, and access to technology and production materials.

When resources are readily available, supplies are rendered elastic. This allows producers to increase the supply of goods and services. In this case, prices also tend to go down. If there is a limited supply of resources, supplies may be scarce. This, in turn, can raise prices.

Technology and Innovation

Supply elasticity can be affected by the production process. More specifically, it can be influenced by any technology and innovation that producers use in their manufacturing process.

If a company doesn't innovate and uses outdated technology in its production process, the supply of (finished) goods and services may be more limited. On the other hand, improving the production process by adopting new technologies and innovations can help make supplies more elastic.

Competition

Competition exists when multiple producers, companies, and suppliers can co-exist and profit by selling to consumers in the open market. Greater competition among producers can render supplies elastic as multiple players produce similar products and fight for profits. Companies will have to respond more quickly to meet demand. If one can't meet demand, others will generally be able to fill that gap.

Conversely, if competition stifles and leaves just a few producers in the market (or, in some cases, just one producer), supplies of products and services may be rendered inelastic. This tends to be true in industries that are very capital-intensive or those that require highly-skilled labor, such as the tech or pharmaceutical industry.

The Bottom Line

The term supply refers to the total amount of goods and services that someone is willing to sell to others in the economy. This can refer to a supplier who sells unfinished goods to a manufacturer or a company that sells finished goods to consumers. The elasticity of supplies, or how responsive producers are to changes in the demand for supplies, depends on one or more factors, including prices, the availability of resources, technology, and competition in the market.