Price Determination in Market Period

Price Determination in the Market Period

• In the market period, the supply of a good is fixed. This is because the time available for production is too short to adjust output.

• The market supply curve is vertical. Any change in price will result in the quantity supplied remaining the same. This is because the firms are unable to increase or decrease their output in response.

• Demand plays the primary role in determining price. A shift in demand will directly result in a new market price.

• The market price is determined by the intersection of the market supply curve and the market demand curve. If the demand curve shifts, the equilibrium point on the fixed supply curve shifts and the new equilibrium price results.

Short-Run Analysis of Perfectly Competitive Markets

• In the short run, a perfectly competitive market has firms that can adjust production, but not enter or exit the market.

• Short-run supply curves are not vertical but upward sloping, indicating a positive relationship between price and quantity supplied. This is due to varying levels of production possible based on resources like labor.

• The short-run supply curve is the aggregate of individual firm short-run supply curves. The upward sloping relationship reflects how increasing output requires higher prices to meet production costs at higher output levels.

• Profit maximization in the short run occurs where the marginal cost (MC) curve intersects the market price (P). In perfect competition, firms are price-takers, meaning they have no individual power to influence the price- this is a key characteristic of the market.

• Short run profits/losses depend on the relationship between the price firms receive for their output and their average total costs (ATC).

Long-Run Analysis of Perfectly Competitive Markets

• In the long run, firms can enter or exit the market in response to profits and losses.

• The long run equilibrium in a perfectly competitive market occurs where all firms are making zero economic profit. This is a key concept of long run equilibrium in perfect competition.

• This long-run equilibrium price equals the minimum of the firms' long-run average total cost (LRATC). This means the economic profits/losses do not exist over the long term.

• The presence of economic profits will lead to new firms entering the market. This will increase market supply, driving down prices, and leading to zero economic profit in the long run.

• If firms are experiencing economic losses, some may exit the market. This will decrease market supply, driving up prices, and ultimately leading back to the zero profit condition. This is crucial for understanding market dynamics.