ROLE OF TIME ELEMENT IN THE DETERMINATION OF PRICE

Marshall divided time into different periods from the viewpoint of supply. Time is short or 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 the demand conditions is that
nature of technical conditions of production is such as to prohibit instantaneous adjustment of
supply to changed demand conditions. A period of time is required for changes to be made in the
size, scale and organisation of firms as well as of the industry.
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 or very short 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. The maximum that can be supplied in the market period is the stock
of the good which has already been produced. In this period more good cannot be produced in
response to an increase in demand. This market period may be a day or a few days or even a few
weeks depending upon the nature of the good. For instance, in case of perishable goods, like fish,
the market period may be a day and for a cotton cloth, it may be a few weeks.
(2) Short Run
Short run is a period in which supply can be adjusted to a limited extent. During the short period
the firms can expand output with given equipment by changing the amounts of variable factors
employed. Short periods is not long enough to allow the firm to change the plant or given capital
equipment. The plant or capital equipment remains fixed or unaltered in the short run. Output
can be expanded by making intensive use of the given plant or capital equipment by varying the
amounts of variable factors.
(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 to variation, none is a fixed factor. During the long period forces

of supply fully adjust them to a given 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.
The price that will prevail depends upon the period under consideration. If a sudden and a onceand-for all increase in demand take place, the market price will register a sharp increase, since
supply cannot increase in the market period. In this market period, firms can sell only the output
that has already been produced. However, in the short run some limited adjustment in supply will
take place as a result of the firms moving along their short run marginal cost curves by
expanding output with the increase in the amount of variable factors. Consequently, the short run
price will come down from the new high level of the market price. But this short-run price will
stand above the level of original market price which prevailed before the increase in demand
occurred.
In the long run the firms would expand by building new plants, that is, by increasing the size of
their capital equipment. In other words, firms would expand along the long-run marginal cost
curves. Besides, the new firms will enter the industry in the long run and will add to the supply
of output. As a result of these long-run adjustments in supply, the price will decline. Thus the
long run price will be lower than the short-run price. But this long-run price will be higher than
the original price which ruled before the increase in demand took place, if the industry happens
to be increasing-cost industry.
The adjustment of supply over a period of time and consequent changes in price is illustrated in
the following where long-run supply curve LRS of an increasing-cost industry along with the
market-period supply curve MPS and the short-run supply curve SRS have been drawn.
Originally, demand curve DO and market-period supply curve MPS intersect at point E and price
OP is determined. Suppose that there is a once- for-all increase in demand from DD to DD.
Supply cannot increase in the market period and remains the same at OM. Market-period supply
curve MPS intersects the new demand curve DD at point Q. Thus, the market price sharply
rises to OP. Short-run supply curve SRS intersects the new demand curve DD at point R.
The short-run price will therefore be OP which is lower than the new market price OP. As a
result of the long-run adjustment the price will fall to OP at which the long-run supply curve
LRS intersects the demand curve DD.
The new long-run price OP' is lower than the new market price OP and the short-run price
OP, but will be higher than the original price OP which prevailed before the increase in demand

took place. This is so because we are assuming an increasing-cost industry. If the industry is
subject to constant costs, the long-run price will be equal to the original price. Further, if the
industry is subject to decreasing costs, the long-run price will be lower than the original price.

It follows from above that the price which prevails in the market depends upon the period under
consideration. It is thus clear that the time plays an important role in the determination of price.
In addition to these a fourth time period is also included which is the very long period in which
basic changes can be made in both demand and supply. In this period changes in supply are
brought about by the changes in technology of production, new innovation etc which cause shift
in supply curve.
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