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Price that is determined by the industry in Price that is determined by the industry in
very short period is called very short period is called
MARKET PRICE MARKET PRICE
MARKET MARKET
PRICE PRICE
Price prevailing
at a particular
time.
nfluenced by
DEMAND only
Because
supply can be
increased up to
the stock
available.
Direct relation
b/w demand
and price.
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EquiIibriu EquiIibriu
m Price m Price
EquiIibriu EquiIibriu
m Price m Price
DEMAND = SUPPLY DEMAND = SUPPLY DEMAND = SUPPLY DEMAND = SUPPLY
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%o study price determination, goods are divided %o study price determination, goods are divided
into two parts: into two parts:
Perishable
goods
Goods that perish
very quickly. Like
fresh vegetables.
Goods that perish
very quickly. Like
fresh vegetables.
Also, goods that go
out of fashion very
quickly
Also, goods that go
out of fashion very
quickly
Durable
goods
Goods that can be
stored for a long
time. Like soap,
electronics.
Goods that can be
stored for a long
time. Like soap,
electronics.
%hese goods have
a reserve price i.e.
minimum price.
%hese goods have
a reserve price i.e.
minimum price.
W W s fixed s fixed..
Supply Supply
W W Perfectly nelastic Perfectly nelastic
Elasticity Elasticity
W W hen demand rises or falls, supply hen demand rises or falls, supply
cannot be increased or decreased cannot be increased or decreased
accordingly. accordingly.
Relation

u u
u u
u1 u1
u1 u1
u2 u2
u2 u2
S
S C
1 1
CuanLlLy CuanLlLy

r
l
c
e

r
l
c
e
Market supply Market supply
perishable goods perishable goods
L L
L1 L1
L2 L2

2 2
As demand ,Price As demand ,Price
As demand ,Price As demand ,Price
W W the minimum price at which a seller is going to sell the minimum price at which a seller is going to sell
a good or provide a service a good or provide a service
W W hen prices are below reserve price, sellers hold hen prices are below reserve price, sellers hold
up the stock rather selling it a lower price. up the stock rather selling it a lower price.
Reserve Reserve
Price Price
W W an be increased or decreased but up to an be increased or decreased but up to
a limit a limit
W W i.e. up to the quantity lying in the stocks. i.e. up to the quantity lying in the stocks.
Supply Supply
W W Demand is equal to supply. Demand is equal to supply.
Market Market
price price
SuppIy of Rice SuppIy of Rice
(quintaIs) (quintaIs)
Price per kg. Price per kg.
(Rs) (Rs)
Demand for rice Demand for rice
(quintaIs) (quintaIs)


15 15 9 9 15 15



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1 1

2 2
C C 1 1 2 2
SS
SS
LL
L1 L1
L2 L2
D D
D D
D1 D1
D1 D1
D2 D2
D2 D2
uant|ty uant|ty

r
|
c
e

r
|
c
e
Durable Goods Durable Goods
As demand ,Price As demand ,Price
As demand ,Price As demand ,Price
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Price that is determined by the industry in Price that is determined by the industry in
short period is called short period is called
SUB SUB- -NORMAL NORMAL
PRICE PRICE
W W can be increased up to the existing can be increased up to the existing
capacity of firms. capacity of firms.
Supply Supply
W W irm continues to produce till breakdown irm continues to produce till breakdown
point. point.
W W i.e. variable cost is covered. i.e. variable cost is covered.
Production Production
W W More elastic as compared to very short More elastic as compared to very short
period. period.
W W Because supply can be increased up to Because supply can be increased up to
the existing capacities of firms. the existing capacities of firms.
Elasticity Elasticity
1 1 2 2
LL
L1 L1
L2 L2
D D
D D
D1 D1
D1 D1
D2 D2
D2 D2
kk

1 1

2 2
C C
uant|ty uant|ty

r
|
c
e

r
|
c
e
SS
SS
Sub Sub- - normaI price normaI price
As demand , Price As demand , Price
As demand , Price As demand , Price
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Price that prevails in the industry in long Price that prevails in the industry in long
period is called period is called
NormaI Price NormaI Price
According to Dr. Marshall According to Dr. Marshall ""Normal Price is that price Normal Price is that price
which tends to prevail in a market when full time is which tends to prevail in a market when full time is
given to the forces of DEMAND and SUPPLY to adjust given to the forces of DEMAND and SUPPLY to adjust
themselves" themselves"
According to Dr. Marshall According to Dr. Marshall ""Normal Price is that price Normal Price is that price
which tends to prevail in a market when full time is which tends to prevail in a market when full time is
given to the forces of DEMAND and SUPPLY to adjust given to the forces of DEMAND and SUPPLY to adjust
themselves" themselves"
n long run supply gets enough period to adjust n long run supply gets enough period to adjust
itself to the changing demand. itself to the changing demand.
n long run supply gets enough period to adjust n long run supply gets enough period to adjust
itself to the changing demand. itself to the changing demand.
W W Price will rise & also the profits of the Price will rise & also the profits of the
firms. firms.
W W Rising profits will attract new firms to Rising profits will attract new firms to
enter in the market. enter in the market.
W W %his will result in increase in supply & %his will result in increase in supply &
thus only normal profits are earned. thus only normal profits are earned.
f supply is f supply is
less than less than
demand demand
W W Price will fall and producers suffers Price will fall and producers suffers
losses. losses.
W W Some producers will leave the industry. Some producers will leave the industry.
W W %his will result in decrease in supply & %his will result in decrease in supply &
again normal profits are earned. again normal profits are earned.
f supply is f supply is
more than more than
demand demand
Determination of normaI price Determination of normaI price
kk

C C
D D
D D
LL
SS

LL

1 1
1 1
AA
nn
G G
2 2
2 2

r
|
c
e

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c
e
uant|ty uant|ty
NN M M
88
NormaI price and return to scaIe NormaI price and return to scaIe NormaI price and return to scaIe NormaI price and return to scaIe
N long period supply curve of an N long period supply curve of an
industry corresponds to its industry corresponds to its
marginal cost curve. marginal cost curve.
So, change in marginal cost So, change in marginal cost
causes a change in normal price. causes a change in normal price.
n long run a firm earns only n long run a firm earns only
normal profits which means normal profits which means
AR=A AR=A
Normal price Normal price
and increasing and increasing
returns to returns to
scale scale
Production Production
increased increased
W W irm enjoys various economies of scale. irm enjoys various economies of scale.
W W So M and A falls. So M and A falls.
W W Since normal price=A and M, so normal price also Since normal price=A and M, so normal price also
falls. falls.
Decreasing Decreasing
cost cost
W ncreasing return to scale is also known as decreasing
cost.
W So as production increases, price of the good faIIs. price of the good faIIs.
kk

C C

r
|
c
e

r
|
c
e
uant|ty uant|ty
SS
SS
D D
D D
D1 D1
D1 D1
LL
L1 L1
NN M M

1 1
Increas|ng returns Increas|ng returns
Supply curve represenLs cosL Supply curve represenLs cosL
curve curve
Supply curve slopes Supply curve slopes
downward from lefL Lo rlghL downward from lefL Lo rlghL
coz as producLlon lncreases coz as producLlon lncreases
cosL decreases cosL decreases
Normal price and Normal price and
diminishing diminishing
returns to scale returns to scale
Production Production
increased increased
W W irm suffers various diseconomies of scale. irm suffers various diseconomies of scale.
W W So A and M rises. So A and M rises.
W W Since, in long run normal price= A & M, so price also rises. Since, in long run normal price= A & M, so price also rises.
ncreasing ncreasing
cost cost
W W Diminishing returns to scale is also known as increasing cost. Diminishing returns to scale is also known as increasing cost.
W W So as production increases, price of the good rises. So as production increases, price of the good rises.
kk

C C

r
|
c
e

r
|
c
e
uant|ty uant|ty
SS
SS
L1 L1
LL
D D
D D
D1 D1
D1 D1
1 1
D|m|n|sh|ng returns D|m|n|sh|ng returns

1 1
Supply curve represenLs cosL Supply curve represenLs cosL
curve curve
Supply curve slopes upward Supply curve slopes upward
from lefL Lo rlghL coz as from lefL Lo rlghL coz as
producLlon lncreases cosL also producLlon lncreases cosL also
rlses rlses
Normal price and Normal price and
constant returns constant returns
to scale to scale
Production Production
increased increased
W W irm faces no economy or diseconomy of scale. irm faces no economy or diseconomy of scale.
W W So A and M remains constant. So A and M remains constant.
W W Since, in long run normal price= A & M, so price also Since, in long run normal price= A & M, so price also
remains same. remains same.
onstant onstant
cost cost
W W onstant returns to scale is also known as constant cost. onstant returns to scale is also known as constant cost.
W W So as production increases, price of the good remains same. So as production increases, price of the good remains same.
kk

C C

r
|
c
e

r
|
c
e
uant|ty uant|ty
1 1

SS
SS
LL L1 L1
D D
D D
D1 D1
D1 D1
Constant return Constant return
Supply curve represenLs cosL Supply curve represenLs cosL
curve curve
Supply curve ls ll Lo x axls coz Supply curve ls ll Lo x axls coz
as producLlon lncreases cosL as producLlon lncreases cosL
remalns same remalns same
Difference between Market Difference between Market
price and Normal price price and Normal price
W W Market price prevails at a particular point of time(very Market price prevails at a particular point of time(very
short period) short period)
W W Normal price is the price that prevails in long Normal price is the price that prevails in long
period(adjusted with supply & demand period(adjusted with supply & demand behaviour behaviour) )
%ime %ime
W W Market price: temporary equilibrium Market price: temporary equilibrium
W W Normal price: stable Normal price: stable euilibrium euilibrium b/w supply and b/w supply and
demand. demand.
Equilibrium Equilibrium
W W Market price: more influenced by DEMAND. Market price: more influenced by DEMAND.
W W Normal price: more influenced by SUPPL. Normal price: more influenced by SUPPL.
nfluence of demand nfluence of demand
& supply & supply
W W Market price: changes quickly Market price: changes quickly
W W Normal price: stable. Normal price: stable.
hanges hanges
W W Market price: is the price that actually prevails in the market. Market price: is the price that actually prevails in the market.
W W Normal price: is the price that is LKEL to prevail in the Normal price: is the price that is LKEL to prevail in the
market. market.
Real & probable Real & probable
prices prices
W W Market price: all goods have market price. Market price: all goods have market price.
W W Normal price: only those goods which can be reproduced Normal price: only those goods which can be reproduced
have normal price. have normal price.
Kinds of goods Kinds of goods
W W Market price: may be more or less than cost of production Market price: may be more or less than cost of production
W W Normal price: always equal to the cost of production. Normal price: always equal to the cost of production.
Profit & losses Profit & losses

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