Determination of Equilibrium Prices

The market period is a very short time in which the quantity already brought to the market cannot be changed. Supply is almost fixed, so demand mainly decides price.

• Meaning: Goods that cannot be stored for long because they spoil quickly.
  Examples: fresh vegetables, fruits, milk.​
• In a single market session (e.g., today’s morning vegetable market), the quantity available is fixed.
• Even if the price rises, sellers cannot increase today’s supply, so the supply curve is vertical.

Diagram idea

• Horizontal axis: quantity of the perishable good.
• Vertical axis: price.
• Supply curve SS is vertical (fixed supply).
• Original demand curve DD meets SS at E, giving equilibrium price OP.
• If demand increases to D₂D₂, the new equilibrium is at E₂, and the price rises to OP₂.
• If demand falls to D₁D₁, equilibrium shifts to E₁, and price falls to OP₁.​

Key points – Perishable goods

• Supply is fixed in the market period.
• Any change in demand causes a large change in price.
• Demand has a dominant role in price determination here.​

Durable goods can be stored and sold later, so sellers can decide how much to sell now and how much to hold back. Examples: wheat, rice, soap, oil.​

• Total stock available in the market is fixed in the very short run, but not all of it must be sold immediately.
• Sellers may keep some stock back if the price is too low.

Reserve price

• Sellers set a minimum acceptable price below which they prefer not to sell; this is called the reserve price.​

Diagram idea 

• Horizontal axis: quantity of the durable good.
• Vertical axis: price.
• Total stock: OQ₀.
• MPS is the market period supply curve for durable goods.
• At the reserve price OR, sellers may hold back the entire stock.
• If demand is D₁D₁:
  i. Price is OP₁.
  ii. Only OQ₁ is sold; the rest is held back.
• If demand is D₀D₀:
  i. Price is OP₀.
  ii. The entire stock of OQ₀ is sold.
• If demand is D₂D₂:
  At equilibrium E₂, price OP₂, again all stock is sold, but at a higher price.

Key points – Durable goods

• Supply is not strictly vertical; part of the stock can be held back.
• Reserve price and expectations about the future determine how much is sold now.
• Demand still influences price, but seller behaviour and expectations also matter.

1. Expected future price
   Expectation of higher future prices → higher reserve price today.
2. Liquidity preference (need for cash)
   Urgent need for money → seller accepts a lower reserve price.
3. Expected future cost of production
   Expected fall in future costs → lower reserve price today.
4. Storage expenses
   High storage cost or long storage time → seller prefers to sell now → lower reserve price.
5. Durability of the commodity
   More durable goods can be stored longer → higher reserve price.
6. Expected future demand
   Expected rise in future demand → higher reserve price.

Think of the short period as “some time, but not enough to change the size of the factory”.​

• Firms can change workers and raw materials but cannot build new factories or close down fully.
• The number of firms is fixed.

Diagram in words

• Horizontal axis: quantity.
• Vertical axis: price.
• Draw a downward sloping line: demand (DD).
• Draw an upward-sloping line: short‑run supply (SRS).
• Where they meet is E → price P and quantity Q (short‑run equilibrium).​

Now:

If demand increases (people want more):

• Draw a new demand curve to the right.
• The new meeting point is at a higher price and higher quantity.
• Firms use the same factory more intensively and can earn extra profit.

If demand falls:

• Draw demand to the left.
• The new point gives a lower price and lower quantity.
• Firms cut output and may face losses in the short run.​

Think of the long period as “enough time for big changes”.​

• Firms can change all inputs (build bigger plants, buy more machines).
• New firms can enter, and old firms can exit the industry.

Because of this:

• If profits are high for a long time, new firms enter, supply increases, and price falls.
• If losses continue → firms leave → supply decreases → price rises.
• Finally, price settles where firms get only normal profit (no big gain, no loss).​

Diagram in words

• Horizontal axis: output.
• Vertical axis: price.
• Draw a downward demand curve (DD).
• Draw a gently upward long‑run supply curve (LRS).
• Their meeting point is E → price P (normal price) and output Q.​

If price is:

• Above P for some time → firms earn extra profit → new firms join → supply rises → price comes down to P.
• Below P for some time → firms bear losses → some firms close → supply falls → price goes up to P.

• Time element (market, short, long period) is essential to explain how quickly supply can respond to demand and how price is determined.​
• In the market period, supply is almost fixed; demand mainly decides price, especially for perishable goods.​
• For durable goods in the market period, sellers can hold stock and use a reserve price, influenced by future expectations and storage costs.​
• In the short period, firms adjust output using existing capacity; demand shifts cause changes in price, output, and short‑run profits or losses.​
• In the long period, firms can change scale and enter/exit; the normal price is the long‑run equilibrium price where firms earn only normal profit and P = MC = minimum LAC.