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Home Price and Output Determination Under Perfect Competition Determination of Short Run Normal Price

 

Determination of Short Run Normal Price of Firm and Industry:

 

Definition:

 

In the short run, the size of a firm and the number of firms comprising an industry remain the same. The time is considered to be so short that if demand for product increases, the old firm can use their existing equipments more intensively but new firms cannot enter into the industry. The short run normal price is established at a point where the short period supply curve and the demand curve intersect each other.

 

The short run supply curve of the industry is the lateral summation of the short period marginal cost curves of all the firms. While the market demand curve is a falling curve indicating that more is bought when price is low and less when price is high.

 

Explanation:

 

The determination of price and output in the short run can be explained with the help of the above diagrams.

 

Diagram/Figure:

 

 

In the fig. 15.15(a) the short run supply curve (SRSC) of the industry intersects the market demand curve at point E. The price will be OL and the quantity supplied OT.                                        

 

We suppose now that the demand for the commodity has gone up. The new demand curve D1D1 intersects the market supply curve (MSC) at point F. The price rise from OL to OR without affecting the output which remains OT as before. The entrepreneur lured by higher prices will use the fixed capital equipment more intensively. The old machines will also be repaired and the production expanded. The new demand curve then intersects the short period supply curve SRSC at point Q.

 

In fig 15.15(b) ON will be the short run normal price which is higher than the original market price OL but lower than the raised market price OR. ON thus is the short run normal price of an industry. This price cannot be changed by the action of an individual firm as it produces an insignificant portion of the total supply of the output. It will have to adjust its product accordingly. At price ON, the firm is earning abnormal profits because the price is higher than the normal price OL.

 

If the market demand falls, the new demand curve D2D2 intersects the market period supply curve at point G. OZ then is the new equilibrium market price which is lower than the original OL market price. The fall in the market price will affect the supply of the commodity. The firms will reduce their output by decreasing the variable factors.

Relevant Articles:

Market Structure
Perfect Competition
Equilibrium of the Firm
Short Run Equilibrium of the Price Taker Firm
Short Run Supply Curve of a Price Taker Firm
Short Run Supply Curve of the Industry
Long Run Equilibrium of the Price Taker Firm
Long Run Supply Curve For the Industry
Price Determination Under Perfect Competition
Market Price
Determination of Short Run Normal Price
Long Run Normal Price and the Adjustment of Market Price to the Long Run Normal Price
Distinction/Difference Between Market Price and Normal Price
Interdependent Prices
Joint Supply
Fixation of Railway Rates

Composite or Rival Demand

 

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Rent
Wages
Interest
Profits
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance

History of Money
 

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