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Importance of Time Element In Price Theory

 Importance of Time Element in Price Theory

            Marshall was the first economist who analysed the importance of time in price determination. When the demand for a product hikes or drops, its supply does not hike or diminish at the same time. Variations in supply depend on technical factors which take time to change. Hence the adjustment amidst demand and supply does not take place at once.

            The period involved in adjustment will depend on the extent to which it is possible to make variations in the volume of manufacture, dimension and functioning of the industry in accordance with the varied demand for its commodities.

            The pricing of non-durable commodities has more significance in the very limited time, while that of non-perishable commodities in the long time. Marshall has divided the pricing of products into four time periods: market period, long period, short period and secular period.

  1. Market Period Price
  2. Market period is a very short period in which supply being fixed, price is determined by demand. The time period is of few days or weeks in which the supply of a product can be amplified out of given stock to match the demand. This is possible for durable goods. The determination of market price is described separately for non-durable goods and non-perishable goods.

    Non-durable Goods – the price of a non-durable goods like milk, vegetables, fish etc are primarily influenced by its demand. Supply has no influence on price because it is fixed. Hence the price of a non-durable commodity hikes with the hike in its demand and drops with the diminishing demand.

    Non-Perishable Goods – Most goods are durable which can be kept in stock. When the price of a non-durable good hikes with the hike in the demand, its supply can be hiked out of given stock. Such goods are cloth, wheat, tea etc.

    Perishability of the goods – The reserve price depends on the perishability of the good. The more non-perishable a product is the higher will be its reserve price.

    Future Cost of Production – The reserve price is also based on the future cost of production of the good. If the sellers expect prices to hike in future he will a high reserve price and vice versa.

    Expenses on storage – The reserve price also depends on the time and expense involved in the storage of the good. The greater the time and expense in storing the good, the lower will be the reserve price, since the seller would like to dispose off his good at the earliest so as to avoid the expenses of storage and vice versa.

    Liquidity Preference – The reserve price depends on the liquidity preference of the sellers. The higher the liquidity preference, the lower will be the reserve since the seller would try to sell his good at the earliest in order ti has cash in hand. Conversely, if the liquidity preference is low the reserve price will be high.

  3. Long Period Price
  4.    The long period is of many years in which supply can be fully adjusted to demand. This is done by changing the fixed factors. During this period, the old machines, equipments and plants can be replaced by the new. New firms can enter the industry and old firms can leave it. The scale of production, organisation and management can also be changed. Thus supply can be adjusted to demand in every possible way in the long-term.

       Long period price is also known as the normal price. Normal price is that price which is likely to prevail in the long run. In the words of Marshall: “Normal or natural value is that which economic forces would tend to bring about in the long-run.”

       Long period is determined by the equilibrium of demand and supply. For the equilibrium of firms and industry in the long run it is essential that normal price should equal the long run average cost, all the firms into industry. If the price is above the minimum long run average cost all the firms would be earning super normal profits. These extra profits would attract new firms into the industry. Consequently supply would increase and price would come down the minimum long run average cost, firms would incur losses. Some of the firms that cannot sustain losses would leave the industry, supply would be reduced and price would rise to the level of the minimum long run average cost.

  5. Short Period Price
  6.    The short period relates to a few months in which supply can be changed in accordance with demand. This is feasible by changing the variable factors. For instance if the firm wants to hike the supply of its product it can do so by working the fixed factors like existing plants, machines, etc.

       In the short period, is not feasible to change the fixed factors, the scale can be hiked or diminished to match the variable factors. In the short period, price is determined by the forces of demand and supply. The short run supply curves inclines upward from left to right like the ordinary supply curve.

       It establishes the short run equilibrium price when it is intersected by the demand curve.

  7. Secular Period
  8.       The secular period is very long. As per Marshall, it is a period of more than ten years in which changes in demand fully adjust themselves to supply. Because it is not feasible to estimate the changes in demand due to changes in techniques of production, population, raw materials, etc.

    Conclusion

          The above analysis shows the significance of time element in price theory. It points out that of two forces, demand supply, which force is more significant in the price determination depends on the time period.

          Usually the shorter the time period, the higher will be the influence of demand on pricing and the longer the time period the greater will be the influence of supply on the determination of prices of goods.

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