4.2 Price Determination
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Transcript of 4.2 Price Determination
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7/28/2019 4.2 Price Determination
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S Kumaraperumal
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Equilibrium between demand and supply
Law of demand
fall in price, Qdemanded rises and vice versa
Law of supplyindustry will offer more
Q of goods when price is higherthan at a lower price
Equilibrium
the level of price atwhich the demand andsupply curve intersect eachother will finally come to
stay in the market
Quantity
Price SupplyDemand
Excess
Supply
ExcessDemand
P
PH
PL
Equilibrium point
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At eq price both partiessatisfied
If price Eq price then some ofthe sellers may not able to sell all Dispose at lower price
Price go down to meet eq price
If Eq price
price the buyerswould not able to get therequired Q
Ready to buy at higher price
Price goes up to meet Eq price
Law of demand
fall in price, Qdemanded rises and vice versa
Law of supplyindustry will offer more
Q of goods when price is higherthan at a lower price
Equilibrium
the level of price atwhich the demand andsupply curve intersect eachother will finally come to
stay in the market
Equilibrium between demand and supply
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Time element in
theory of price
Price determinants areboth demand, supply andtime( Marshall)
Both demand and supply depends ontime that allowed price to adjust
Supply takes time to adjust itself to a
change in the demand condition
time categories
market period
short period
long period
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Determination of
market priceMarket period
Very short period
Supply is fixed
Supply is limited to existing
stock of the good
Change in demandproduces changes in pricewhen supply is constant
Perishable goods
inelastic perfectly verticalstraight line
Q
Price supply
Demand
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Determination of
market priceMarket period
When price of durable goodsare decrease with decrease indemand
Supply can be decreased bykeeping source quantity ininventory
Supply can be increased outof the given stock if itsdemand and price increase
durable goods
inelastic perfectly verticalstraight line
Q
Price supply
Demand
O
Reserve
price
Max
Price
(entire
Supply
offer for
sale)
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Determination of
market priceShort run price (shortperiod normal price)
Firms keep producing evenif they are not able to cover
ATC
If not they lose their fixedcost
Firms will stop to supply till they
get price that cover theirvariable costs
Price is determined by bothsupply and demand
Q
Price
supply
Demand
O
MPSSRS
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Determination of
market priceLong run price(normal price)
Determined by long runequilibrium
Firms will stop to supply till they
get price that cover theirvariable costs
Price is determined by both supplyand demand
Q
Price
supply
Demand
O
SRS