Question

Discuss the role of the time element under the conditions of perfect competition.

Answer 1

Alfred Marshall, an economist, created the concept of time, which is essential to comprehending how output and price are set in a perfect market. Time constraints have an impact on how supply reacts to shifts in demand, which in turn affects the level of prices. A Very Long Period (Secular Period) was added by some economists to Marshall’s three primary eras of time: the Market Period, the Short Period, and the Long Period.

1. Market Period:
   • Time Span: Extremely short-only existing stock can be sold.
   • Supply Condition: Supply is perfectly inelastic (fixed); no time to produce more.
   • Price Determination: Depends entirely on demand.
   • Example: Perishable goods like milk or vegetables-price fluctuates quickly with demand.
2. Short Period:
   • Time Span: Limited time where variable factors (like labor and raw materials) can change, but fixed factors (like plant size) remain unchanged.
   • Supply Condition: Supply can adjust partially.
   • Price Determination: Price is influenced by both demand and supply, but more by demand.
   • Firms may earn: Abnormal profits or losses, as entry and exit of firms are not possible in the short run
3. Long Period:
   • Time Span: Long enough to adjust all factors of production (fixed and variable).
   • Supply Condition: Supply is fully elastic - firms can enter or exit the industry.
   • Price determination: Determined by cost of production (supply side), since firms have time to adjust.
   • Firms earn: Normal profit, and price equals Average Cost = Marginal Cost = Price.