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Home » Economics Homework Help » Microeconomics Help » Time Element Price
Time Element Price
Marshall, who propounded the theory that price is determined by both demand and supply, also gave a great importance to the time element in the determination of price. Time element is of great relevance in the theory of value, since one of the two determinants of price, namely supply, depends on the time allowed to it for adjustment. It is worth mentioning that Marshall divided time into different periods from the viewpoints of supply and not from the viewpoint of demand. Time is shorter long according to the extent to which supply can adjust itself. Marshall felt it necessary to divide time into different periods on the basis of response of supply because it always takes time for the supply to adjust fully to the changed conditions of demand. The reason why supply takes time to adjust itself to a change in demand conditions is that nature of technical conditions. A period of time is required for changes to be made in the size, scale and organizations of firms as well as of the industry.

Another point is worth nothing. When Marshell distinguished short and long periods he was not using clock or calendar time as his criterian, but ‘operational’ time in terms of economic forces at work. in this regard, as said above, supply forces were given the major attention and time was short or long according to the extent of adjustment in the forces of supply. The greater the adjustability of the supply forces, the greater the length of the time irrespective of the length in clock time.

Marshall divided time into following three periods on the basis of response of supply to a given and permanent change in demand.

1. Market period: the market period is  a very short period in which the supply is fixed, that is, no adjustment can take place in supply conditions. In other words, supply in the market period is limited by the existing stock of the good.

2. Short run: short run is a period in which supply can be adjusted to a limited extent. During the short run the firms can expand output with given equipment by changing the amounts of variable factors employed. Short periods are not enough to allow the firm to change the plant or even capital equipment. The plant or capital equipment remains fixed or unaltered in the short run.

3. Long run: the long run is a period long enough to permit the firms to build new plants or abandon old ones. Further, in the long run, new firms can enter the industry and old ones can leave it. Since in the long run all factors are subject themselves to given a change in demand; the size of individual firms as well as the size of the whole industry expands or contracts according to the requirements of demand.

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