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Importance of time element in the process of price determination under perfect competition

Here, we understand about the importance of time element in process of price determination under perfect competition with the help of diagram in detail.

Importance of time element in the process of price determination under perfect competition:
This concept has been explained by Professor Marshall. According to him, price is determined by the interplay between demand and supply in a perfectly competitive market. Supply cannot be adjusted instantly to the change in demand. It takes time to change production according to demand. It indicates that longer the period of time, the greater will be the importance of supply in price determination. To bring out the importance of time element, Marshall has distinguished between four types of equilibrium prices. They are as follows-
  1. Market Price (very short period): Here, in short period of time, the supply is completely fixed. It cannot be increased at short notice. The supply of fresh vegetables or milk is an example. It indicates that the supply is fixed, demand is the sole factor that determines the price. If the demand rises, supply remaining fixed, price rises much. This we understand perfectly with the help of figure-
    As shown in figure, price rises from AB to CB. This is due to rise in demand as shown by shift in demand curve. Market price is an extremely short period equilibrium price.
  2. Short Period Price: It indicates that given little more time, there is a tendency for supply to adjust to change in demand. If demand has increased, manufacturers will try to produce more and supply will increase. Here, during short period supply might increase but not sufficiently. Here, supply factor might assume importance but still demand side is predominant. Figure-
    As shown in figure, When price rises from AB to CE, but the rise in price is less than before. This is due to adjustment in supply.
  3. Long Period Price (Normal): Here, it clearly indicates that long period is a period sufficient for supply to adjust to change in demand. The scale of production of individual firms will be adjusted. Fixed costs will be spread over the increased output, that means average cost will fall. The price will come down in the long run and may be equal to or slightly higher than the previous price. During long period, marginal cost of production will influence the price. Here, the supply curve in the long run will have a less. Figure-
    As shown in above figure, the supply curve cuts the new demand curve at C, the new price is CE which is higher than price AB but it is not much. This is due to impact on the cost of production in the long run. The long run equilibrium price known as normal price. Market price fluctuate around the normal price. It means that the market price is influenced by changing condition in demand, but tends to settle at level of normal price.
  4. Very Long (secular) Period Price: Here, in the very long period the basic conditions of supply change. New inventions and their applications have far reaching effects on costs of production. It is the supply side, i.e. the cost of production which is predominant in the determination of price. Here, it is possible that price might fall despite rise in demand.
Importance of time element in the process of price determination under perfect competition
Market Price
Short Period Price
Long Period Price
Very Long (secular) Period Price.
Price Determination - Importance of time element in the process of price determination under perfect competition.
Kinnari
Tech writer at NewsandStory
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