Price Elasticity of Supply (Evaluation of Factors)

Here is a sample answer to this question. "Evaluate two factors which determine the degree of price elasticity of supply."

Evaluation Point 1:

One factor that determines the degree of price elasticity of supply is the amount of spare capacity that a business has. For example, in the building industry after a recession, it is likely that house-builders will be able to hire plenty of extra workers if they want to expand the number of new homes being constructed. This is because of a high rate of cyclical unemployment.

However, there might also have been a drop in net inward migration of skilled construction workers from EU and non-EU countries which could lead to labour shortages. Furthermore, even though skilled labour might be available, there could also be low stocks of building materials or construction equipment.

Evaluation Point 2:

Another factor affecting price elasticity of supply is the length of the production period. In farming for example, the growing period for arable crops means that there is usually a time delay between crops being planted and harvested. Unless surplus crops can be stored and also maintain their quality, then supply of some crops will be price inelastic.

A counter point is that, advances in farming technology and the impact of climate change is meaning that many crops in countries such as the UK can now be grown for nearly all months and year and globalisation has increased the supply capacity of imported foodstuffs to meet changing demand. This helps to increase supply elasticity.