DTRM NATION OF LONG-RUN NORMAL PRICE
Market price may fluctuate owing to a sudden change either on the side of supply or on that of demand.big arrival (If fish, for instance. may depress its price in a particular market. A sudden heat wave may raise the price of ice are, however, temporary influences and cause temporary disturbances in the market price. In the absence of such disturbing causes, the price cuds to come back to a certain level. This level itself may nut be a fixed point for all times. But if the techniques and scale of production remain on the whole constant, this level may be taken as a, fixed anchor around which, in its day-to-day movements, market price oscillates. Adam Smith culled this level “natural” price and Marshall called it “normal” price. 11\ the words of Marshall, ” ‘Normal or natural value of a commodity
is that which economic forces would tend to bring about in the long-run. It is probably worth purifier out that “Normal Prices are not the same thing as ‘average’ prices unless prices are constant. Normal pries are those prices to which are may expect the actual prices to tend. They will not only he influenced by fluctuations and oscillations, hut will also take account . of the general trend towards the ‘normal’ price.”? In order tu describe how long-run equilibrium is brought about and thus normal price is determined, it is useful to refer to the market period .and short-run period also. I\s we have stated above, the market periods so short that no adjustment in the output can be made. There is a given amount of the stuck of the goods on hand, and, in case of perishable goods, the whole of it must be sold at whatever price the market will fetch. In the market period or very short-run, costs of production have no influence on price, short-run period, however, is sufficient to allow the firms tl1 make limited output adjustment. If there is an increase in demand, the Finns will expand output, by more intensive use of the fixed capital equipment and by greater use of the variable fistfuls. tell the point where new price equals marginal A the short-run price will be higher than the
before the increase in demand hut not high as the market price, and the output will he greater.
In the long period. the supply conditions arc fully adapted to meet the new demand conditions. If there is a sudden and once-for-all increase in demand, the firms in the long-run will expand output by increasing the use of variable as well as of the fixed factors of production. They may enlarge their old plants or build new plants, Moreover, in the lung-run, new firms can also enter the industry and thus, add tu the supplies of the product. In the long period, average variable cost is of nu particular relevance, since, in the all factors arc variable and none fixed. In this period, all costs ever incurred by the firm must be covered, and hence all arc price-determining. Price, in the long-run, or normal price, under perfect competition, therefore, be equal to the minimum long-run average cost. we explained that a firm under perfect competition IS in long-run requires Librium at the output if the price is above the Mir I mg-run average cost. the firms will be ma profits. Therefore, in the long-run enter the industry to compete away these c Ira lit. and the price will all to the level where it the minimum long Average cost. Neither price rail below the minimum average cost smc Iloa e the firms will be incurring losses. In Ion -run. if these losses persist, some of the firms will I c the industry. As a result, the price will rise to tI cvcl uf minimum average cost, SlI that in the lung-run firms are earning only uonnal profits. . Thus, we see that if the pncc i above or below Ihe minimum long-run average co I, djusuueut takcs place in he output primarily hy the entry of new firms or exit of some existing finus . u that new price once more equals the minimum average cost. But whether this long-run minimum average cost is equal to or is higher or lower than the previous one will depend on whether the industry in question subject to the law of constant cost, increasing cost or decreasing cost. slow the normal price is determined under conditions of increasing cost, constant cost or decreasing cost is explained below.