Time Elements Used in the Theory of Price Determination

Time Elements Used in the Theory of Price Determination!

Prof. Marshall propounded that price is determined by the demand and supply of a commodity.

Thus he had given great importance to the “Time Element” in the theory of price. Basically, time has a great relevance in the theory of price.

The reason being supply of the commodity depends on the time allowed for its adjustment. Prof. Marshall has divided the time on the basis of supply rather than demand. Time may be short or long according to the extent to which supply can adjust itself. Moreover, Prof. Marshall used the operational time in terms of economic forces at work rather than clock or calendar time.

“Time plays an important part in economic theories. It is of special importance in relation to the problem of value. If society were static, that is, if the time element were eliminated price would represent the real cost of production, but society is dynamic-habits, tastes and fashions are continuously changing while methods and volumes of production vary frequently.

Classification of Time Element:

Dr. Marshall has divided the time element in the following four categories:

1. Market Period:

Very short period refers to the type of competitive market in which the commodities are perishable and supply of such commodities cannot be changed at all. We can take into account commodities like vegetables, fruits, milk and milk-products, butter and other such commodities as are perishable over a short period of time.

Since the supply of these commodities is fixed, the supply curve acts like the lower blade of a pair of scissors. In the case of very short period, the forces of demand determine the price of a commodity. Quite often it is seen that early in the morning, the price of vegetables or fruits is high, but by noon, as the demand falls, the sellers start lowering the price and it is for this reason that by evening the price of fruits or vegetables falls considerably.

This is all the more important in the case of green vegetables and such fruits which cannot be preserved till the next day. The sellers know their position and therefore, they are quite willing to reduce the price as demand falls. Thus, the forces of demand determine price in the case of very short period.

2. Short Period:

Short period is not much different from very short period except that the commodities in question are not perishable but durable though of a short duration than capital. The supply of a commodity is fixed to the extent that more capital equipment cannot be used and production of a greater output is possible, only by an intensive use of existing capital.

There is, however, a maximum limit beyond which output cannot be increased. The size of the plant, the scale of operations and the organizational set-up of the firm will not be changed in the short-period. Nor could new firms enter into the industry during this period in case the demand for the commodity went up, because the rise in demand was likely to be short lived.

The point to be noted is that supply in the short period can be changed or adjusted only partially (not fully) to changes in demand with the help of the existing capital equipment. Equilibrium brought about between demand and supply during the short period is known as short period equilibrium.

3. Long Run Period:

Long period price is called by Adam Smith as “natural price” and Marshall called it as normal price. According to Marshall, “the normal value or price of a commodity is that which economic forces would tend to bring about in the long run.” He further said that, “as a general rule the shorter the period, which we are considering, the greater must be the share of our attention which is given to the influence of demand on value and longer the period, the more important will be the influence of the cost of production on value.”

It means that in the short period the influence of demand is comparatively greater than supply; while in the long period the influence of supply is comparatively greater than demand. The supply of the commodity is influenced by the cost of production of the commodity. Thus the cost of production is influenced by the laws of returns.

In short, the long period price of the commodity may be higher than or lower than or equal to the original market price according as the industry is subject to increasing, diminishing or constant costs respectively.

4. Secular Period:

Marshall also talked of secular or very-very long period. During this period all underlying economic factors such as the size of population, supplies of raw materials, general conditions of capital supply etc., have time to alter. The period being too long no satisfactory generalization can be made about it.