A comparative analysis of market price and normal price can be made on the following grounds:
1. Period of Time:
Market price is for a particular time but normal price is for a period of time. Market price is the price prevailing on a particular day or a particular time. It is the result of market demand and supply.
Normal price, on the other hand, is the result of long period demand and long period supply.
The price of rice may be expected to be round about Rs. 100 per quintal in the next year or two. But on any particular day or during a very short period, the price may be more or less than the normal price of Rs. 100.
2. Effect of Demand and Supply:
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Market price is influenced more by demand but normal price is influenced more by supply. Though market price is the result of demand and supply, demand is more important force. The higher the demand, the higher will be the price.
But normal price is the result of long period normal demand and normal supply. Both demand and supply will have influence but the influence of supply viz., cost of production will be more important. Over a long period, a commodity will not be produced unless the cost of production is covered.
3. Effect of Temporary and Permanent Force:
Market price is determined by temporary equilibrium between the forces of demand and supply at a time, normal price is the result of long-run equilibrium between demand and supply when the supply conditions have fully adjusted themselves to the given demand conditions.
For example, the demand for sweet may go up during Diwali or other festivals, demand for ice will depend upon weather conditions whereas normal price will be influenced by a number of factors like tastes, fashions and population etc.
4. Unstable and Stable Price:
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Market price may change continuously but the normal price is more stable. Market price will go on fluctuating around the normal price till ultimately permanent equilibrium is achieved. Just as the pendulum of a clock goes on oscillating around the point of rest and ultimately comes to a standstill, similarly the market price oscillates around the normal price.
In the short period, at any moment, the market is in equilibrium, but this equilibrium is the result of the temporary inter-section between demand and supply. If the conditions of perfect competition prevail, the market prices in the long run will come to normal price.
Thus, the market price cannot diverge violently from the normal price for long; it simply fluctuates just above and below the normal price and shortly returns towards it. It is just like waves in the sea. Sometimes waves go up or down but try to come to normal position. Normal situation does not exist. This fact is explained in the diagram 12.
5. Real and Imaginary Price:
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Market price is the real price, while normal price is hypothetical price. No doubt, normal price is the ideal price, but it never prevails in the market. Even if we take for granted that it does exist in the long run, it will turn into the market price when we actually go to the market on the day to inquire the price of the particular commodity. Normal price is, therefore, purely a theoretical concept.
6. Effect of Cost of Production:
A market price can be more or less than the marginal cost of production but normal price cannot be more or less than the marginal cost of production. It is equal to the marginal cost of production. If it is more or less than the marginal cost of production, some producers will either enter or leave the industry.
7. Short-Period and Long Period Price:
Market price is also called the short-period price because it prevails in the short-run. Whereas normal price is called the long-period price because it prevails in the long-run.
