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Unit-12: Pricing Under Perfect Competition

the seller will try to sell the goods as soon as possible. On the contrary, less cash preference will Notes
result in high reserve price.
(vi) Demand in future: Reserve price depends on the demand in future. If the seller hopes that
demand will rise in future, then he will fix high reserve price and possibility of less demand
result in low reserve price.
So in this way, due to two price levels, sellers will not sell any quantity in minimum reserve price
whereas at maximum price level he will be ready to sell the entire quantity of the product. As the price
of the product will increase with the increase in demand, the seller will sell more quantity from the
available stock till the demand reaches the maximum price at which he will sell the entire stock. After
this, increase in supply will not be possible with the increase in demand. That is why the supply curve
of durable goods is vertical at this level.

Fig. 12.3

S
1

Price P 1 M

E
P D 1
A
P
2 D
S
D
2
O Q Q Q
2 1
Output
In Fig. 12.3. SMS is supply curve of market period. OQ is the total stock of the goods. OS is lowest
1
1
or reserve price at which the seller does not sell the product at all. When demand curve D intersects
supply curve SMS at E, then price OP is determined at which OQ quantity of the goods is sold and
1
OQ remains in the stock of the seller. Decrease in the demand to D will result in fall in the prices from
1
2
OP to OP at which OQ is sold and quantity Q Q is stored in the stock. The seller will be eager to sell
1
2
2
2
the entire stored quantity at the maximum price OP only when the demand will rise to D . If demand
1
1
further rises from D then price will increase again further because in market period, quantity more
1
than OQ cannot be sold.
1
Thus in market period demand has more influence on price determination in comparison to supply
because in very short run period sellers do not estimate production.
Self Assessment
Multiple choice questions:
5. Reserve price depends on ............................. of the product.
(a) durability (b) buy (c) sell (d) price
6. Reserve price depends on ............................. in future.
(a) cast (b) cost of production (c) productions (d) time

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