Economics – Price elasticity of supply | e-Consult

Factors Contributing to Highly Elastic Supply:

• Ease of Production: The commodity is relatively easy and quick to produce. This means that producers can easily adjust output in response to price changes.
• Availability of Resources: Resources required for production are readily available and can be easily adjusted.
• Low Storage Costs: The commodity has low storage costs, so producers can easily store or dispose of unsold output.
• Large Number of Suppliers: There are many suppliers of the commodity, so no single supplier has a significant impact on the market price.

Short Run Decision-Making:

• In the short run, a firm with highly elastic supply will be highly responsive to changes in the market price.
• If the price increases, the firm will significantly increase its output to capitalize on the higher profit margins.
• If the price decreases, the firm will significantly reduce its output to minimize losses.
• The firm will likely aim to maximize profit by adjusting its output level to meet the prevailing market price.

Long Run Decision-Making:

• In the long run, the firm may consider adjusting its production capacity to match the expected market price.
• If the price is expected to remain high, the firm may invest in expanding its production facilities.
• If the price is expected to remain low, the firm may reduce its production capacity or exit the market.
• The firm's long-run decisions will be influenced by its expectations about future market conditions.

Implications for Profit Maximization:

• A firm with highly elastic supply can easily adjust its output to maximize profit.
• The profit-maximizing output level will be where marginal cost (MC) equals marginal revenue (MR).
• Because supply is elastic, the firm can adjust its output to meet changes in demand and maintain a relatively stable profit level.