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Unit-12: Pricing Under Perfect Competition

Notes
Fig. 12.7

Y
MS
P'
P SRS
1
Price P P 2 LRS

D
1
D
X
O Q Q Q
1 2
Quantity

When the law of increasing returns or diminishing costs applies to an industry, then the long time
supply curve slopes downward from left to right as LRS curve shown in Fig. 12.8. PQ is original market
price and OQ quantity of goods is sold or purchased, then as demand increases from D to D , then
1
market price rises to P'Q at once. With the increase of supply from OQ to OQ , during short time, then
1
the price falls from P'Q to P Q . There long time price is less than original market price, P Q < PQ. The
1 1 2 2
reason is when production increases on implementing the laws of increasing returns to an industry,
then the cost per units diminishes.

We come to this conclusion that the factor whether long time price will be more, equal or less than the
original market price is dependent on the fact which law (Law of Diminishing Return, Law of Constant
Return or Law of Increasing Return) is applicable to an industry.

Fig. 12.8

MS

P' SRS
Price P 1

P
P
2
LRS
D D 1
O Q Q Q
1 2
Quantity

4. Secular Period: Secular period is of very long time. According to Marshall it is more than
10 years of time in which with the change in demand completely adjusted with the supply can be
done. To understand the changes in technique, population, raw material and demand etc, during
this long term is impossible that is why Marshall did not analyze the price determination during
the secular period.

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