EmmaHing
November 14th, 2007, 10:09
The “Normal or Natural” value of a commodity is that which economic forces would tend to bring about in long run. It is important to note here that, “normal prices” are not same as “average prices.” Average prices are the arithmetic average of all the prices that prevail, while normal price is the price that one may not expect. Only when prices are constant, normal and average price is same, otherwise they differ.
Normal price is a long period equilibrium price, which is determined by permanent forces of demand and supply. In long periods, the supply is able to match with demand because of ample time. The firms are able to increase or decrease their size or level of production or new firms enter or exit the industry to keep parity between demand and supply.
Normal price has an important characteristic, that is normal price is always equal to the average cost or in other words, the firm only has normal profits, which is included in the normal price or average costs. If normal price is more than average cost, the firm will have excess profit. Attracted by this excess profit, new firms will enter the industry that will again increase supply and equate normal price with average cost.
If normal price is less than average cost, the producers will suffer losses and will be unable to bear this loss and will be forced to leave the industry. This will reduce supply and again normal price will become equal to average cost. That is, in the long period, the firm will only have normal profit that is included in average cost.
Regulatory affairs experts with years of specialisation in economics are normally called upon to tackle the problems affecting the law of increasing costs. Maintaining the normal or natural value of a commodity in the market is a ticklish issue and will greatly test the decision-making skills of the regulatory affairs experts.
Normal price is a long period equilibrium price, which is determined by permanent forces of demand and supply. In long periods, the supply is able to match with demand because of ample time. The firms are able to increase or decrease their size or level of production or new firms enter or exit the industry to keep parity between demand and supply.
Normal price has an important characteristic, that is normal price is always equal to the average cost or in other words, the firm only has normal profits, which is included in the normal price or average costs. If normal price is more than average cost, the firm will have excess profit. Attracted by this excess profit, new firms will enter the industry that will again increase supply and equate normal price with average cost.
If normal price is less than average cost, the producers will suffer losses and will be unable to bear this loss and will be forced to leave the industry. This will reduce supply and again normal price will become equal to average cost. That is, in the long period, the firm will only have normal profit that is included in average cost.
Regulatory affairs experts with years of specialisation in economics are normally called upon to tackle the problems affecting the law of increasing costs. Maintaining the normal or natural value of a commodity in the market is a ticklish issue and will greatly test the decision-making skills of the regulatory affairs experts.