Elasticity refers to the change in quantity supplied (or demanded) as its price changes. An elastic good or service is one whose demand or supply falls sharply as the price changes. Similarly, for an inelastic good or service, change in price will not affect the quantity supplied or demanded. For example, water is an inelastic good, whereas mobile phones are elastic goods.
The main influences on the elasticity of supply are:
- possibility of resource substitution: Some ingredients are tough to replace, while others have readily accessible substitutes. Depending on the ease of resource substitution, a supplier may be able to react very well to a price change and alternate his supply accordingly. Goods that have readily available substitutes have high elasticity of supply. For example, a ferrari will have low elasticity of supply, whereas a simple pencil will have high elasticity of supply.
- time frame for supply decisions: will directly affect the supplier's ability to maintain or adjust the supply of goods. The longer the time frame available after the price change, the higher will be the elasticity of supply. For example, a firm may be able to handle a momentary change in supply (surge or decline) by hiring extra labor, but in the longer run will require more permanent solutions.
- Ease of good's storage: the easier the storage (of goods), the more elastic the supply will be.
- Level of inventory: a higher inventory means more elastic supply.