Question 1 (ii)

Discuss the key determinants of price elasticity supply of cooking in Zambia

 "Price elasticity of supply measures how responsive producers are to a change in the price of

good. It is defined as a measure of the responsiveness of quantity supplied to change in price".

Elastic Supply:

Elasticity of supply represents the extent of change in supply in response to a change in price. If

the amount supplied is highly responsive to a change in price, the supply is said to be elastic.

Inelastic Supply:

If the amount offered for sale is less affected by price change, then the supply is said to be

inelastic.

The following points highlight the main determinants/factors which determine the degree

of price elasticity of supply

Time period. 

Time is the most significant factor which affects the elasticity of supply. If the price of a

commodity rises and the producers have enough time to make adjustment in the level of output,

the elasticity of supply will be more elastic. If the time period is short and the supply cannot be

expanded after a price increase, the supply is relatively inelastic. Supply is more elastic in the

long run than in the short run. The longer the time period the easier it is to shift resources among

products, following a change in their relative prices.

Ability to store output. 

The goods which can be safely stored have relatively elastic supply over the goods which are

perishable and do not have storage facilities. Most oil-bearing crops have a short harvest season.

This means that processors may have to buy crops for the entire year’s production and properly
store them until they are processed. In addition, there can be unpredictable supplies and large

variations in prices for the raw materials.

The Nature of the Industry

The most important factor affecting price elasticity of supply is the nature of the industry under

consideration. This indicates the extent to which production can be increased in response to an increase in

the price of the product. If inputs (especially raw materials) can be easily found existing market prices, as

in the cooking oil industry, then output can be greatly increased if price rises slightly. This means that

supply is fairly elastic in the cooking oil industry. On the other hand, if production capacity is severely

limited, as in cooking oil industry, then even a very large increase in price of cooking will lead to a very

small increase in production. This means that the supply of cooking is fairly inelastic.

Factor mobility

If the factors of production can be easily moved from one use to another, it will affect elasticity

of supply. The higher the mobility of factors, the greater is the elasticity of supply of the good

and vice versa. As with demand elasticity, the most important determinant of elasticity of supply

is the availability of substitutes. In the context of supply, substitute goods are those to which

factors of production can most easily be transferred. For example, a farmer can easily move from

growing oil-bearing crops to producing maize. Of course, mobility of factors is very important

for such substitution. As a general rule, the more easily factors can be transferred from the

production of one good to that of another, the greater the elasticity of supply.

Changes in marginal cost of production. 

If with the expansion of output, marginal cost increases and marginal return declines, the price

elasticity of supply will be less elastic to that extent. When there is excess capacity and the

producer can increase output easily to take advantage of the rising prices, the supply is more
elastic. In case the production is already up to the maximum from the existing resources, the

rising prices will not affect supply in the short period. The supply will be more inelastic.

The availability of spare capacity

If fixed factors of production are being used to the fullest extent, however great the increase in

price, the supply will be inelastic. If however, a firm is operating below capacity and there are

unemployed resources, supply will be elastic.

Availability of infrastructure facilities

If infrastructure facilities are available for expanding output of a particular good in response to

the rise in prices, the elasticity of supply will be relatively more elastic. If variable factors of

production are not easily available, then supply will be inelastic even if the firm has spare

capacity in its fixed factors of production. A firm should be able to employ variable factors of

production easily and combine these with spare fixed factors that are available before the supply

becomes elastic.

Risk-Taking:

The willingness of entrepreneurs to take risks also affects price elasticity of supply. This, in its

turn, depends on the system of incentives and disincentives. If, for example, the marginal rates of

tax are very high, a price rise will not evoke much response among producers

The Cost of Attracting Resources

If supply is to be increased it is necessary to attract resources from other industries. This usually

involves raising the prices of these resources. As their prices rise, cost of production also

increases. So supply becomes relatively inelastic. If these resources can be obtained cheaply then

supply is likely to be relatively elastic. These considerations become very important at times of
full employment when the only available factors of production are those which can be attached

from other industries and uses.

The Level of Price

Elasticity of supply is also likely to vary at different prices. Thus when the price of a commodity

is relatively high, the producers are likely to be supplying near the limits of their capacity and

would, therefore, be unable to make much response to a still higher price. When the price is

relatively low, however, producers may well have surplus capacity which a higher price would

induce them to use..

The Impact of Supply And Demand

Http://www.Fao.Org/Docrep/008/A0185e/A0185e04.Htm

Determinants/Factors of  Price Elasticity of Supply

http://www.economicsconcepts.com/determinants_of_price_elasticity_of_supply.htm

Price Elasticity of Supply:

http://www.economicsconcepts.com/elasticity_of_supply_meanings.htm