Price Determination under perfect competition : Price Determination under perfect competition In a perfectly competitive market, market demand and market supply determine the equilibrium price.
Price of a commodity is determined by the demand and supply. Both the demand and the supply vary with price.
The price at which the quantity demanded is equal to the quantity supplied is the equilibrium price.
Equilibrium price. : Equilibrium price. 300 3 S D D S E X O Y QUANTITY PRICE
Market price vs. Normal price : Market price vs. Normal price The price determined in the very short period is called Market price.
As supply remains constant, in this period, demand plays an important role in the determination of price.
in the long run supply can be adjusted fully to changes in demand. In this period supply plays an important role. The price prevailing in the long run is called Normal price
MARKET PRICE-NORMAL PRICE : MARKET PRICE-NORMAL PRICE 1.It prevails at a particular time.
2. It changes continuously.
3. It is the real price.
4. It is a temporary equilibrium price.
5. It is governed by temporary causes.
6. It may be above or below the average cost
7. All commodities have a market price.
8. In the determination of market price demand plays a dominant role. 1) It prevails during a long period.
2) It does not fluctuate.
3) It is a hypothetical price.
4) It is long run equilibrium price.
5) It is influenced by permanent and persistent causes.
6) It must be equal to marginal cost and long run minimum average cost.
7) Only reproducible commodities can have normal price
8) In the determination of this price, supply plays a dominant role.