Page 245 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes
Fig. 12.2

MS

E 1
P
Price P 1 E
P E 2 D 1
2 D
D
2
O Q
Quantity

Price in market is known as market price.

Durable Commodities: Many durable goods which are stored in stock and with the increase in demand
when price rises then there can be increased to certain limit from the available stock. These are goods
like cloth, wheat, tea etc .These types of goods have two price levels—
One, minimum price below which seller will not sell his products at any cost. It is known as
Reserve Price. Second, maximum price at which the seller is ready to sell the entire quantity of his
commodity.

Self Assessment

Fill in the blanks:
1. There are two parties dealing in the market. One buyer and the other ........................ .
2. ......................... law applies on buyers.
3. Demand and supply are two opposite forces, which move ......................... to each other.
4. Marshall was the first economist who ......................... time element in price theory
Every seller considers these facts while putting a certain reserve price of his product—
(i) Durability of the commodity: Reserve price depends on the durability of the commodity. The
more durable the commodity is the more will be the reserve price.
(ii) Prices in future: Reserve price depends on the changes in price in future. If there is hope of
increase in prices then the seller fixes higher prices and if there is possibility of fall in prices
then they fix low price.
(iii) Future cost of production: Reserve price depends on future cost of production. If sellers hope
to raise the cost in future, they will fix high reserve prices.
(iv) Expenses on storage: Reprices are also determined by expenses and time on storage. As much
cost includes investing in storage and time, the reserve price would high and vice versa.
(v) Liquidity Preference: Reserve price depends on liquidity preference of the sellers. The more
is the preference for cash, the lower will be the reserve price as due to more necessity of the N,

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