Role of Time Element in Price Determination

Role of Time Element in Price Determination

1. Dr. Abdul Azeez N.P @ AMU
Role of Time Element in the
Determination of Value
Dr. Abdul Azeez N.P.
Assistant Professor
Department of Economics
Aligarh Muslim University

2. Importance of Time
Time plays an important role in the theory of price determination because supply
(SS) and demand (DD)conditions are affected by time.

Marshall was the first economist who analyzed the importance of time element.

When DD for a product rises/falls, SS does not increase/decrease at the same time.

Changes in supply depend on technical factors which take time to change.

Therefore, the adjustment between demand and supply does not take place at once.
Dr. Abdul Azeez N.P @ AMU

3. Marshall divided time into different periods from the view
point of supply and not from the viewpoint of demand.
Time
Very short
period
Short
period
Long
period
Dr. Abdul Azeez N.P @ AMU

4. Market period is a very short period in which supply being fixed, price is
determined by demand.

This period is too short to increase production of the commodity in
response to an increase in demand.

In this period the supply cannot be more than existing stock of the
commodity.

Very short period (Market period)
Dr. Abdul Azeez N.P @ AMU

5. Perishable Commodities like milk, vegetable, fish etc.
the price is influenced by its demand.

The supply of perishable goods is perfectly inelastic
during market period.

Supply has no influence on price because it is fixed.

Therefore the price of a perishable commodity rises
with the increase in its demand and falls with the
decrease in its demand.
Very short period (Market period)
Perishable Goods
Dr. Abdul Azeez N.P @ AMU

6. In case of durable commodities which
can be kept in stock.

Like cloth, wheat, tea etc.

When the price of commodity increases
with the increase in its demand, its
supply can be increased out of the given
stock.
Very short period (Market period)
Durable Goods
Dr. Abdul Azeez N.P @ AMU

7. The short period refers to that period in which supply can be adjusted to
a limited extent.

In the short period fixed factors of production remain unchanged, i.e.,
productive capacity remains unchanged.

But, supply can be affected by changing the quantity of variable factors.
Short period
Dr. Abdul Azeez N.P @ AMU

8. In the short period, price is determined by
the forces of demand and supply.

The short-run supply curve slopes upward
from left to right like the ordinary supply
curve.

It establishes the short-run price which is
also known as the short-run normal price.
Short period
Dr. Abdul Azeez N.P @ AMU

9. The long period is of many years in which supply can be fully adjusted to demand.
During this period all factors of production are variable.

This is done by changing the fixed factors. As such, in the long-run, the firms can
change the scale of production.

The size of the firms and their plant capacity can be altered. Thus, in the long-run
supply can be fully adjusted to the changing demand conditions.

Long period price is also known as the normal price. Normal price is that price which is
likely to prevail in the long-run.
Long period Market Price
Dr. Abdul Azeez N.P @ AMU

10. In the long-run, the supply
curve of an industry tends to
become relatively elastic than
short run.

When increasing costs operates
in an industry the long-run
supply curve LPS slopes upward
from left to right.
Long period Market Price
Dr. Abdul Azeez N.P @ AMU

11. Long period Market Price
When the industry is
operating under constant
costs, the long-run supply
curve LRS is horizontal to the
X-axis
Dr. Abdul Azeez N.P @ AMU

12. The Secular period is very long period.

It is a period of more than ten years in which changes in demand fully
adjust themselves to supply.

Since it is not possible to estimate the changes in demand due to changes
in techniques of production, population, raw-materials etc.

over a very long period, therefore, Marshall did not make any analysis of
pricing under the secular period.
Secular period
Dr. Abdul Azeez N.P @ AMU