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Time: An Important Determinant of the Elasticity of Supply

17 April, 2015 - 17:40

Time plays a very important role in the determination of the price elasticity of supply. Look again atthe effect of rent increases on the supply of apartments. Suppose apartment rents in a city rise. If we are looking at a supply curve of apartments over a period of a few months, the rent increase is likely to induceapartment owners to rent out a relatively small number of additional apartments. With the higherrents, apartment owners may be more vigorous in reducing their vacancy rates, and, indeed, with morepeople looking for apartments to rent, this should be fairly easy to accomplish. Attics and basementsare easy to renovate and rent out as additional units. In a short period of time, however, the supply response is likely to be fairly modest, implying that the price elasticity of supply is fairly low. A supply curve corresponding to a short period of time would look like S1 in Figure 5.7. It is during such periodsthat there may be calls for rent controls.

If the period of time under consideration is a few years rather than a few months, the supply curve is likely to be much more price elastic. Over time, buildings can be converted from other uses and new apartment complexes can be built. A supply curve corresponding to a longer period of time would look like S2 in Figure 5.7.