MICROECONOMICS

CHAPTER 4 PRICE DETERMINATION

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BY : GHALIB HUSSAIN
Discuss equilibrium price with the help of demand and supply under following conditions.
i. Market Period
ii. Short Run Period
iii. Long Run Period
Definition
The short period has been
defined by Stigler as “the
period in which the rate of
production is variable, but
The Short Run
in which there exist a fixed
Period Price plant.”
Determination
The short period refers to
that period in which supply
can be adjusted to a limited
extent.
In the short run, the fixed
factors like machinery,
plant etc. cannot be altered.
Ghalib Hussain (GH)
Variable factors may be
increased or decreased
according to the changes in
demand. As a result, the
short period supply curve
will be elastic to some
extent. The short period
price is determined by the
interaction of the forces of
short-run demand and
supply.
 Ghalib Hussain (GH)
The Short Run Period Price Determination

DD is the initial demand curve and MPSC is the market

period supply curve. Both intersect at point E. the market
price is OP and the quantity supplied is OM.

A shift in demand curve from DD to D1D1 represents an

increase in demand. The market price will also rise from OP
to OP1.

The short period supply curve (SPSC) shows that, in the short
period, supply is able to adapt itself somewhat to a limited
extent to the changed demand conditions. The new demand
curve D1D1 intersects the SPSC at OP2 price. Now the
quantity supplied is OM1.
The new short-run equilibrium price becomes OP2, which is
higher than the initial market price OP, but it is not so high as
the second market period price OP1. The short-run supply has
also increased from OM to OM1.