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Unit-12: Pricing Under Perfect Competition

price rises to OP from OP then (supply) P s > P d (demand), by which ds additional supply is created in Notes
1
1
1
market. On less demand, sellers decrease the prices to sell the additional supply, till equilibrium price
is established again. This proves that price is determined by demand and supply and once equilibrium
price is established, then in case of any deviation, forces of demand and supply will eventually brought
the price to equilibrium point.

Demand and supply are two opposite forces, which move opposite to each other.

12.2 Importance of time Element in Price Theory

Marshall was the first economist who analyzed the time element in price determination. When there
is increase or decrease in the demand, then the increase or decrease in supply does not take place at
the same time. Change in supply depends on the technical factors which take time to change that is
why adjustment of supply with demand does not take place at once. How long will be the time period,
depends as the fact that whether it is possible to bring change in scale of production, size and organization
according to demands. Then there is also importance of time element in price determination as per
nature of the goods price determination of perishable goods has more importance in small time period
whereas long period is more important for durable commodities. In price determination Marshall has
divided the equilibrium in demand and supply in four time periods—Market Period, Short Period,
Long Period and Secular Period.

Now we discuss these time periods one by one:
1. Market Period Price: Market period is a very short period in which supply of goods being fixed,
price is determined by demand. This time period lasts for some days or weeks in which supply can be
increased as per demand with the available stocks only. It is possible for durable goods. Time period
for perishable goods is one day. For instance, demand of vegetable if increases then they cannot be
increased, that is why supply of vegetables being constant, price is determined by demand.
The price in the market period is known as market price which changes many times in a day, every
day, many times a week or after the week according to nature of the goods. Marshall has described
Market price as, “Market price normally gets affected by those incidents or reasons which are unstable.
Its action is sudden in short run in comparison to those which move steadily.” Actually, market price is
that price of a commodity which is determined by interaction of demand and supply at a definite time.
Market price is determined differently for perishable and durable goods.
Perishable Commodities: Price of perishable goods such as milk, vegetables, fish, etc. is mainly
influenced by demand. These are not affected by supply because their supply is fixed. So, increase in
demand of perishable goods leads to rise in prices and decrease in demand results in fall in prices. In
Fig. 12.2 price determination of perishable goods. Such as fish is explained. MS is supply curve which
shows OQ is fixed quantity in market period. D is original demand curve which intersects supply curve
MS at point E which results in determination of price OP. If demand increases from D To SD then the
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new equilibrium will be at E which shows rising price OP . On the other hand decrease in demand
1 1
from D to D results in fall in price from OP to OP . This clarifies that market price is determined by
2 2
demand only where supply OQ remains fixed. Every time demand of perishable goods like vegetable,
milk, fish, ice etc. increases or decreases in summer, price will also rise or fall accordingly.

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