The price determined during the market period (i.e. the period, generally a day or so in which the supply cannot be increased due to increases in demand of a commodity) is called market price. On the other hands, the price determined under the short run and the long run is called the normal price.
“It is the price which is settled by the interaction of demand and supply forces during the market period, i.e. the time period which is so short that the sellers are unable to increases or decrease the quantity of the good available in the market”(Alfred Marshall).
Determination of Market Price
The market price is determined by market supply. The market supply is a quantity offered for sale in a market at different prices by the sellers during the market period. Market supply may be of two types:
- (Market supply of perishable goods like vegetables etc. The whole stock has to be disposed off at the prevailing price.
- Market supply of durable goods like shoes, chairs etc. i.e. the goods which can be stored.
Keeping in view these two types of market supply, we discuss market price under the following two cases:
Market price of Perishable Goods
Market supply of perishable goods is perfectly inelastic which yields a vertical market supply curve. Since the supply is fixed, the market price is decided by demand. If demand is higher, the market price will also be higher; and vice verse.
Market Price of Durable Goods
Market supply of non-perishable goods is elastic at lower prices because the sellers may store these goods with the expectation of higher prices but at higher prices, the supply again becomes perfectly inelastic because it is not possible to increase the production during the market period.
Thus initially the market supply curve has a positive slope but later it becomes vertical. Consequently, initially, the market price is determined by the interaction of demand and supply forces but when the market supply curve becomes vertical it is only demand for the goods which decides the price.
In the given figure, initially, when the supply curve is elastic, the market price is determined by the interaction of demand and supply forces. Later when the supply curve becomes vertical; it is only the demand curve which decides the market price.
Now if demand is the higher market price is higher and vice versa.
“It is the price which is settled by the interaction of demand and supply forces during a short period or long period”.
It is a time period in which there is neither entry nor exit of new firms due to the rise and fall of price and consequent increase in profit or loss respectively. The existing firms only try to increases production by working longer hours or by hiring additional workers and using more raw materials and vice versa.
Supply of such a period is called short period supply. The short period supply curve is a little more elastic than the market supply curve because adjustments are possible in production due to a change in price. Anyhow, short period supply (SPS) curve is always steeper.
It is a time period in which new firms can join the industry or the existing firms can leave the industry keeping in view the profit or loss situation due to change in price. The supply of such period is called long period supply. It should be noticed here that long period supply(LPS) curve is always flatter.
In a nutshell, normal price can be discussed under two cases
|Short period normal price||Long period normal price|
Short period normal price is associated with a short period while long period normal price is associated with a long period or long run. We can explain both the cases of normal price with the help of the following diagram
The given figure illustrates that change in demand leads to change in both normal prices. Moreover, equal change in demand leads to a higher change in the short run normal price as compared with the long run normal price because of the basic features of short period and long period.
Comparison of Market Price and Normal Prices
The diagram shows that increase in demand leads to the highest increase in market price, i.e. OP3, a lower increase in short period normal price, i.e. OP2 and the lowest increase in long period normal price, i.e. OP1.
As far as different versions of quantity are concerned, there is no change in market quantity due to higher demand because the market supply curve (MSC) is perfectly inelastic.
Anyhow, increase in demand brings about an increase in short period quantity, and long period quantity i.e. OQ2 and OQ3 respectively. We observe a lower increase in short period quantity and higher increase in long period quantity because the short period supply curve(SPSC) is less elastic while long period supply curve (LPSC) is more elastic.
The concepts of market price and normal price can be comprehensively explained in the following sketch