Time Periods and Price Fixation

Time Periods and Price Fixation:

Time Element:

Time element plays a significant role in economics. Modern economists divide time periods into short and long period. The equilibrium price obtained above is valid only for a specific time period. Any modification in demand and supply over a period of time will shift the demand and supply curves and various equilibrium will be acquired.

For illustration, the flexibility of a firm in adjusting its creation to meet the change in demand based on the nature of its inputs. There are two kinds of inputs that are, fixed inputs and variable inputs.

The fixed input is one whose quantity can’t be adjusted in a restricted time period. Heavy machinery, buildings & capital tools are such fixed inputs and they might require more time for installation or substitution.

Though, variable inputs such as labor, raw materials and electricity can be modified quickly to modify the supply until the full plant capacity is arrived. Now it is possible to differentiate among short and long period. The short period for a firm is the time period throughout which at least one of the inputs is fixed input. The long period is the time period throughout which every input are variable inputs.

The particular duration of the short and long period will differ from firm to firm. A small stall on the roadside pavements can modify all the inputs even within a solitary day, since all inputs are simply variable. The seller can install its shop, use vegetables and other ingredients within a day to meet any sudden rise in demand. Therefore, for him the duration of long period can even be a single day. On other hand, installation of specialized machinery for cement plant might take years, since the production, transportation, installation need a long period of time.

Price Fixation in the Short Period:

Alfred Marshall mentioned time element in the determination of equilibrium and divided them into market period, short and long period.

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