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- According to Marshallian theory of value, the forces of demand and supply determine the price. The position of supply is greatly influenced by the element of time. Supply is to be adjusted in relation to changing demand in the view of the time span given for such adjustments.
Market period price – Market period is a very short period during which it is practically impossible to alter output or increase the stock. Thus the supply of the commodity tends to be perfectly inelastic.
Short period price – Short period is that period during which supply of the commodity can be changed to some extent though scale of production remains unchanged. Here supply curve is elastic to some extent.
Long period price – Long period is sufficient time period during which the firms can change the scale of production to match the changing demands. Thus supply curve becomes perfectly elastic in the long run
The degree of elasticity of supply tends to vary in relation to time. In the short period the utility of the commodity has greater significance in the determination of its value (price). In the long run the supply exerts greater influence on equilibrium price determination.
The distinction between pure and perfect competition
It is more a matter of degree than of kind. For a market to be purely competitive four fundamental conditions must prevail (first four conditions in the list). For perfect competition four additional conditions must be fulfilled (next four in the list).
Price determination under perfect competition
- U nder perfect competition there is a ruling market price determined by the interaction of forces of total demand and total supply in the market.
- B oth buyers and sellers are price takers and not the prices makers.
Assuming that firms always attempt to maximise profits, basic economic theory provides a framework for determination of price. The rationale to this theory is – If the production and sale of an additional unit of product adds more to revenue than to cost, profit is increased and thus that unit should be produced and sold.
In other words the firm continues to increase output until marginal revenue (MR) is larger than marginal cost (MC). Thus the firm is in equilibrium only when MR = MC
Short run equilibrium of the firm under perfect competition
Normal profit - It is the minimum profit just sufficient to keep the entrepreneur in that business. It is the opportunity cost of entrepreneurship. As it is the factor cost of entrepreneurship, it is included in the cost curve itself. So when the firm’s revenue is equal to cost, it is earning the normal profit.
Super-Normal Profit – Revenue over and above the cost indicates the super-normal profit.
The monopolist can control both price and supply of the product. But at any point of time she can fix only one of them. Either she can fix the quantity of output and let the market demand determine the price of the product; or she can fix the price of the product and let the market demand determine the quantity which she can sell at the given price.
Having profit maximising objective, she adopts the rationale of equating MC with MR and fixes the level of output which gives her the maximum profits or where the losses are minimum. Thus when equilibrium output is decided, the price is automatically determined in relation to the demand for the product.
A monopolist may be earning profits or incur losses in
If the seller faces iso-elastic curves in two markets, the price discrimination will not be profitable, as the AR and MR of those two markets will also be equal in that case. Hence if any amount of output transferred from one market to the other and different prices are charged, the gains realised in one market is lost in the other.
MR = P [e-1/ e ]
When the monopolist considers separate markets, he takes the combined marginal revenue ( ∑ MR) by aggregating the MR of different markets and distributes equilibrium total output in different markets so that marginal revenues in each market are the same.
“ Dumping is the act of selling a good abroad at a price lower than the selling price of the same good at the same time and in the same circumstances at home, taking account of differences in the transport cost”
“ Monopolistic competition is defined as a market setting in which a large number of sellers sell differentiated products”
“ Monopolistic competition is a market situation in which there is keen competition, but neither perfect nor pure, among a group of large number of small producers or suppliers having some degree of monopoly power because of their differential products” – Prof. E.H. Chamberlin
Product differentiation is the major feature of monopolistic competition
- Product differentiation may broadly be defined as anything that causes buyer to prefer one product to another. Therefore, in the real sense, product differentiation exists in the mind of consumer. That is it is not necessary for the difference to be real-it is only necessary for the consumer to think it is real.( The role of advertising and brand name )
- The real differentiation among products may arise due to :
- Barometric price leadership – A firm ( not necessarily the dominant firm ) taking lead in price change ( which is due but not effected due to uncertainty in the market ).
- Ability to forecast the market conditions more accurately
- A firm initiates a well publicized changes in the price which are generally followed by rival firms. Such firm need not be the largest or low cost firm in the industry but should have the better knowledge of the prevailing market conditions and ability to predict them more precisely.
Reasons for the evolution of barometric leaders
- Rivalry between large firm leading to cut-throat competition to the disadvantage of all the firms make them unacceptable.
- Lack of capacity and desire to make continuous calculations of cost, demand and supply conditions on the part of many firms.
- As a reaction to the long term economic welfare.