CHAPTER - I
R O L E AND IMPORTANCE OF P R I C E THEORY
IN E C O N O M I C A N A L Y S I S
The
price
economics.
arises
or
theory
Robbins
effective
circle
the
base
problem
scarce.
only
This
in
economic
price
problems
it
is
and o t h e r
illustrations
problems
system,
of
despite
that
is,
now
known
Over
ecological
the
problems
existence
to
deny
practice
the
of
when t h e g i v e n g o o d o r
of p r i c e
of
the
determination.
are
economic
these being beyond the
importance
the
population,
i s n o t a p a r t of t h e s y s t e m of e x c h a n g e .
not
that
may c r o p u p e v e n w h e r e
system does not o p e r a t e .
pollution
the
the
e x c h a n g e m a k e s a g o o d / s e r v i c e command a p r i c e
However,
into
into
of
market.
entry
good
becomes
when t h e g o o d / s e r v i c e e n t e r s
exchange;
there
when a
scarcity
of
circle
the
of
is
at
(1932) e m p h a s i z e s t h a t
an economic
service
lies
price
service
This
is
theory
and
The l e v e l
of
p r i c e and t h e magnitude and d i r e c t i o n of i t s change,
according
to conventional
upon the excess
theory,
may
depend
demand/supply.
The e n t r y of a g o o d / s e r v i c e i n t o t h e c i r c l e
exchange makes the d e t e r m i n a t i o n
1
of
price
of
the
core
problem
of
economics.
The p r i c e
theory
p e r v a d e s t h r o u g h t h e t h e o r y of c o n s u m p t i o n ,
of p r o d u c t i o n
and t h e t h e o r y of
In
price
fact,
the
theory
is
theory
distribution.
the
s y n t h e s i s i n g and i n t e g r a t i n g f a c t o r
unifying,
of
different
t h e o r i e s a n d b r a n c h e s of e c o n o m i c s . D i f f e r e n t
parts
o f e c o n o m i c t h e o r y may b e f i t t e d t o g e t h e r b y m e a n s
of
price
theory.
It
is
e x p l a n a t i o n of t h e p r i c e
the understanding
and
formation process
that
e x p l a i n s t h e w o r k i n g of a n e c o n o m i c s y s t e m i n
entirety.
It
is,
therefore,
its
not surprising
that
t h e p r i c e s c o n s t i t u t e t h e c e n t r a l p r o b l e m of
both
t h e t h e o r e t i c a l and e m p i r i c a l economics.
seems t o have a p t l y o b s e r v e d t h a t
ten
cases
theory
of
application,
heing
The p r i c e
a.ppl
theory
it
ied
has
is
in
turns
the
nine
out
out
that
price
naturally
Tov/nsend
"the
theory
' .
occupied
the
c e n t r e - s t a g e of e c o n o m i c a n a l y s i s e v e r s i n c e
e m e r g e n c e of e c o n o m i c s a s a
PRICE
THEORY
For having
IN
analytical
RETROSPECT
a p p r e c i a t i o n and an
it
b r i e f l y s u r v e y t h e recei\/ed
contribution
adequate
appropriate
f r a m e w o r k f o r t h e i n v e s t i g a t i o n of
p r o b l e m o f my r e s e a r c h ,
observed
empirical
that
the
science.
a proper perspective,
understanding,
of
will
theory
phenomena
my own research
and
be h e l p f u l
to
explain
the
may make
the
to
the
possible
to
the
enhancement
of the
of the understanding-
formation
of the prices
of the
process
of foodgrains
in
India.
CLASSICAL AND NEO-CLASSICAL PRICE
THEORY
Both the Classicals and N e o - C l a s s i c a l s have
envisaged the theory of prices as an instrument
of equilibrium. According to the Classical Theory,
c h a n g e s in p r i c e e n s u r e e q u i l i b r i u m
between
the d e m a n d for and supply of each commodity. But
this t h e o r y e n v i s a g e s p r i c e s to be d e t e r m i n e d
mainly by the cost of production, and hence, the
supply of goods and services. Demand
could
thus
be taken
hardly
had
any role
implicitly
as the datum that
in the determination
of prices.
The logic
underlying the theory is that the producers will
generally not agree to sell their goods at prices
lower than the cost of p r o d u c t i o n . The cost of
production, however, fixes the floor level of the
p r i c e of any g o o d . A c t u a l p r i c e m a y b e h i g h e r
than this .
The utilitarian school, however, hypothesized
the p r i c e s to be d e t e r m i n e d b y the l e v e l
and
changes in demand. If the producers have incurred
high cost in the production of any good and the
consumers do not consider it worth their while to
p a y the h i g h p r i c e to c o v e r the h i g h cost of
production incurred by the producers, the good ( s )
will consequently remain unsold. Then, the price
is to be determined in the current period, while
the cost is generally incurred in the p a s t , the
period when the production process is initiated
and completed. Thus, the cost becomes the datum.
But the utility will set the u p p e r limit of the
p r i c e that the consumers m a y b e w i l l i n g to p a y
for the given g o o d ( s ) . However, the actual price
may b e lower than this maximum p r i c e .
A c a r e f u l analysis of these p a r a d i g m s w i l l
r e v e a l that there is a g r a i n of t r u t h in b o t h
these theories. Each of these theories deals only
with the price determination in the two limiting
c a s e s . W h e r e a s the classical theory d e l i n e a t e s
the minimum or the floor level of the price, utility
theory delimits the ceiling of the p r i c e . Actual
price m a y , however, vary b e t w e e n these m i n i m u m
and maximum limits of the prices of the limiting
cases. In that case, neither of the two theories
may be relevant to explain the actual behaviour
of prices.
MARSHALIilAN
SYNTHESIS
M a r s h a l l (1962) synthesised and coordinated
these
opposite views by introducing the concept
of 'periods' of different d u r a t i o n s . The extent
of a d j u s t m e n t of s u p p l y t o t h e c h a n g e s i n demand
depends upon t h e method t h a t can be u s e d t o r a i s e
t h e s u p p l y of t h e g i v e n g o o d / s e r v i c e
in
the
g i v e n p e r i o d . The o u t p u t of a g o o d / s e r v i c e may be
r a i s e d / l o w e r e d by one o r more of t h e
following
mechanisms:
(a)
D e p l e t i o n / a c c u m u l a t i o n of s t o c k b r o u g h t
f o r w a r d from t h e p r e c e d i n g p e r i o d may l e a d t o t h e
c o n t r a c t i o n / a u g m e n t a t i o n of s u p p l i e s t o
the
m a r k e t . But n o t h i n g more c o u l d b e a d d e d t o t h e
supply in the market p e r i o d .
It
i s as if
the
s u p p l y becomes f i x e d i n t h e m a r k e t p e r i o d . The
d u r a t i o n of t h e m a r k e t p e r i o d i s s o s h o r t
that
t h e o u t p u t of t h e g i v e n g o o d c a n n e i t h e r
increased nor decreased within the
Consequently,
consideration
the
supply
equals
(ii)
demand
consumption
(iii)
in
for
as intermediate
that
good
has been set
under
and
in view'
f o r (i) self
other
period.
output
^Quantities
purposes
such
the stock
future.
kept
the
the current
"quantities in view'.
r e f e r t o t h e stock
of
be
the
may
consumption,
than
the
demand,
apart
for
F o r e x a m p l e , q u a n t i t i e s of
direct
and
sales
milk,
n o r m a l l y used t o s a t i s f y s e l f consumption needs of
the producers and/or to produce m i l k - p r o d u c t s ,
may be d i v e r t e d t o s a t i s f y t h e m a r k e t demand f o r
m i l k on a p a r t i c u l a r d a y .
T h e s t o c k may b e d e p l e t e d a l m o s t
to meet
t h e e x c e s s demand,
the u n s o l d
the
quantities
deficiency
of
stock practically
stock
the market,
of
the
whereas
good(s)
to
demand may b e a b s o r b e d
in
immediately.
or
were,
due
from t h e c u r r e n t
into
as i t
instantaneously
Accumulation
inflows
of
the
the depletion
of
of
good(s)
stock
to
r a i s e t h e o u t f l o w s of t h e g o o d ( s )
from t h e
c a n t a k e p l a c e i n p e r i o d s of a l l
d u r a t i o n s . But
accumulation
outside
of
stock and c a r r y i n g
t h e p e r i o d of s t u d y i s
all
t h e M a r s h a l l i a n c o n c e p t o f quantity
is extended.
In
view'
of
the
market
Marshall
p e r i s h a b l e g o o d s . But t h e a n a l y s i s may c o v e r
view
of
case
to
if
analysis
So
in
period
goods,
the
forward
feasible
of d u r a b l e o r non p e r i s h a b l e g o o d s .
confined
it
market
to
The aJbove ^concept
^Include
Marshall
Marshall,
stock
's
In
Concept
of
It
' Is
of
the
quantities
my
extension
same
(See,
1962).
The s u p p l y c u r v e i n t h e m a r k e t p e r i o d
therefore,
price
be a v e r t i c a l
shall
demand,
shift
in
that
straight
be determined
is,
by
the
line
will,
and
changes
t h e d e g r e e and d i r e c t i o n of
i n t h e demand c u r v e :
the
in
the
O
Quantity
Figure : 1
In the above figure, MS represents the fixed
supply of OM quantity, whereas DDs are the demand
c u r v e s . T h e q u a n t i t y a v a i l a b l e for s a l e s can
neither be raised nor lowered w h a t e v e r
the
demand, and hence, the price, P m o v e s up or down
a c c o r d i n g to the upward or d o w n w a r d m o v e m e n t /
shift of the demand curve. The market price, the
price that prevails in the m a r k e t p e r i o d , w i l l
g e n e r a l l y be higher/lower than the equilibrium
p r i c e , w h e n e v e r t h e r e is a c h a n g e in d e m a n d .
This explanation conforms to the price formation
norm of the price theory enunciated by the utility
school.
(b)
S u p p l y m a y be a d j u s t e d b y the r a i s i n g /
lowering of the rate of output per unit of time.
T h e r a t e of o u t p u t m a y b e r a i s e d / l o w e r e d
by
(i) adjusting only the supply of variable factors
of production in the short run. In the short run,
the supply of fixed factors of production can not
b e r a i s e d / l o w e r e d . But the s u p p l y of
f a c t o r s , like u n - s k i l l e d / u n - e d u c a t e d
variable
labour,
raw materials etc. may easily be raised/lowered
e v e n d u r i n g this p e r i o d . H e n c e , the s u p p l y of
good(s) will not be totally flexible to get fully
adjusted to the state of demand. But it will also
not be perfectly inflexible. In the short period,
when the supply of fixed factors of p r o d u c t i o n
c a n n o t b e altered, rate of o u t p u t p e r unit of
time may be increased/decreased only upto a point.
T h o u g h the supply of the good m a y be increased/
decreased according to the state of demand, the
adjustments in supply are limited by the inflexibility
of the supply of fixed factors and the fixity of
the scale of production, that is, firm's size and
the n u m b e r of firms o p e r a t i n g in the m a r k e t .
Besides, the cost of production, and h e n c e , price
8
s h a l l be h i g h e r than the i n i t i a l
equilibrium
p r i c e . C o n s e q u e n t l y , s u p p l y w i l l a l s o p l a y some
r o l e i n t h e d e t e r m i n a t i o n of p r i c e s i n p e r i o d s of
s u c h s h o r t d u r a t i o n , t h o u g h demand s h a l l
dominate the price formation process
b e c a u s e of t h e f a c t
that it
still
simply
i s g e n e r a l l y not
p o s s i b l e t o a d j u s t t h e s u p p l y f u l l y t o t h e changes
i n demand :
S2
Price
Supply
Figure: 2
As i s shown i n t h e a b o v e d i a g r a m , t h e p r i c e
s h a l l s t i l l be h i g h e r / l o w e r t h a n t h e
initial
e q u i l i b r i u m p r i c e , though i t s h a l l be l o w e r t h a n
t h e m a r k e t p r i c e . The r e a s o n i s t h a t t h e m a r g i n a l
c o s t of supplying the i n c r e a s e d / d e c r e a s e d q u a n t i t i e s
of t h e good (s) i n a c c o r d a n c e w i t h t h e p r e v a i l i n g
demand i n t h e s h o r t r u n w i l l e x c e e d t h e
initial
marginal c o s t , while the increase in supply w i l l ,
t o some e x t e n t , m o d e r a t e and m i t i g a t e t h e e x c e s s
demand which, i n i t s t u r n , s h a l l c o n t a i n t h e r i s e /
fall
i n p r i c e somewhat, t h o u g h t h e
increased
m a r g i n a l c o s t of a d d i t i o n a l s u p p l y w i l l r a i s e t h e
p r i c e above t h e i n i t a i l e q u i l i b r i u m l e v e l .
(c)
The s u p p l y of b o t h t h e v a r i a b l e and f i x e d
f a c t o r s of p r o d u c t i o n may b e a d j u s t e d f u l l y
to
manage t h e c h a n g e s i n demand i n t h e l o n g r u n .
It
i m p l i e s t h a t t h e s u p p l y of a l l t h e f a c t o r s becom.e
f l e x i b l e i n t h s long r u n . The d i s t i n c t i o n b e t w e e n
t h e f i x e d and v a r i a b l e f a c t o r s d i s a p p e a r s .
o t h e r w o r d s , s i z e of t h e f i r m s i n t h e
In
industry
may b e r a i s e d / l o w e r e d t o e f f e c t c h a n g e i n t h e
s u p p l y , b e s i d e s changing s u p p l y t h r o u g h a l t e r a t i o n
i n t h e r a t e of o u t p u t t o m e e t t h e c h a n g e s
in
demand. T h i s i s p o s s i b l e o n l y i n t h e l o n g r u n .
B e s i d e s , d e c r e a s e / i n c r e a s e i n t h e number of firms
i n t h e i n d u s t r y t h r o u g h t h e e x i t of t h e e x i s t i n g
o r e n t r y of t h e new f i r m s i n t o t h e i n d u s t r y c a n
a l s o o c c u r . T h i s makes i t p o s s i b l e t o a d j u s t t h e
10
supply fully to the changes in demand in the long
r u n , w h e n the firms p r o d u c e the g o o d s at
the
lowest cost. The distinction between marginal and
average costs also disappears.
Supply may be adjusted fully to the changes in
demand in the long run through (i) accumulation/
depletion of stock, though this process of adjustment
may not be needed, (ii) rate of output per unit of
time can easily be increased/decreased, (iii) size
of the firms, operating in the industry, m a y be
raised/lowered, and (iv) new firms m a y enter the
industry, while existing ones may leave it in the
l o n g r u n . T h e r e s u l t is t h a t t h e c h a n g e s
in
d e m a n d do not affect the price in the long run.
D e m a n d m a y , therefore, be treated as the d a t u m
in the long p e r i o d , w h i l e the s u p p l y is f u l l y
a d j u s t a b l e to the given demand a n d the c h a n g e s
thereof. In other words, as the supply of goods
is p e r f e c t l y elastic in the long r u n , the firms
shall endeavour to produce the optimum output at
the minimum cost. The price w i l l , therefore, be
determined by the supply or cost of production as
the demand is treated as a datum:
11
%
02
Qv
P2
01 .
\ ^
4
PpCfi
PI
l/P
Qj
\M
^fl
^
M 11L
X
F'ps: 3
liS/PS is t h e p e r f e c t l y e l a s t i c
s u p p l y c u r v e . C h a n g e s in d e m a n d a r e
long
run
totally
a c c o m m o d a t e d through the corresponding changes
in supply without there being any c h a n g e in the
cost of production, and hence, the p r i c e .
T h e long p e r i o d p r i c e , the " N o r m a l P r i c e ' ,
is determined by the cost of production. The cost
12
c o m p r i s e s of e x p e n d i t u r e on b o t h t h e v a r i a b l e and
fixed f a c t o r s , whereas the s h o r t run marginal
c o s t may p e r t a i n t o t h e c o s t of v a r i a b l e
factors
a n d i n t e r m e d i a t e i n p u t s a l o n e , by and l a r g e .
It
i s t h e demand which i s t a k e n a s t h e datum i n t h e
long r u n and t h e p r i c e i s s e t t l e d a t a l e v e l which
c l e a r s t h e m a r k e t . The s h o r t r u n p r i c e , c a l l e d t h e
m a r k e t p r i c e i s , however, d e t e r m i n e d b y demand.
M a r k e t may o r may n o t b e c l e a r e d .
According to Marshall,
fluctuates
market
around
price
normal
price
coincide,
market.
role
tends
through
there
Price
in
equilibrium
the
the
is
normal
market
price.
to converge
time.
stable
flexibility
attainment
the
price
But
towards
Once these
duration:
13
markets
prices
in
the
and the maintenance
in each of these
the
two
equilibrium
thus plays
the
of
the
pivotal
of
different
Figure: 4
KEYNESIAN
THEORY
As a g a i n s t t h e c l a s s i c a l a n d n e o - c l a s s i c a l
t h e o r i e s , t h e Keyesian t h e o r y (Keynes,1936), which
i s p r i m a r i l y t h e s h o r t r u n macro t h e o r y ,
the
general
also
take
remain
price
to be fixed.
the different
fixed
the concept
analysis
level
sectoral
in the short
run.
of the fixity
for
the
first
prices
Keynes
of prices
time.
14
But
into
the
assumes
This
also
may
to
introduced
economic
fixity
of
prices
ma.y not
concept
be
confused
with
the
new
of f i x p r i c e s . Keynes r e p l a c e d t h e p r i c e
flexibility
by o u t p u t
flexibility
for
a t t a i n m e n t a n d m a i n t e n a n c e of e q u i l i b r i u m
the
in
t h e m a r k e t . A c c o r d i n g t o Keynes, f l e x i b i l i t y i n
o u t p u t b r i n g s a b o u t t h e changes i n employment and
the equilibrium is restored and/or maintained
t h r o u g h t h e m a n i p u l a t i o n of t h e e f f e c t i v e demand.
E f f e c t i v e demand d e p e n d s u p o n i n v e s t m e n t ,
and
h e n c e , e m p l o y m e n t . Whereas
and
the
neo-classicals
believed
that
prices
and/or
maintains
the
restores
Keynesians
changes
restoration
postulate
in output
classicals
the flexibility
the
that
play
the pivotal
or maintenance
of the
8u()(ily/Duafllily
Figure: 5
15
the
of
equilibrium,
level
role
and
in
the
equilibrium.
The c l a s s i c a l s e n v i s a g e d t h a t t h e d i s t u r b a n c e
i n eqiailibriiiin r e l e a s e s / a c t i v a t e s t h e autonomous
f o r c e s of t h e m a r k e t t o r e s t o r e t h e e q u i l i b r i u m
a t f u l l employment l e v e l , w h e r e a s Keynes and t h e
Keynesians
like Philips postulate
that
the
(a) m a r k e t c a n a t t a i n e q u i l i b r i u m and t h e s y s t e m
c a n r e m a i n i n e q u i l i b r i u m even a t l e s s t h a n f u l l
employment l e v e l f o r c o n s i d e r a b l e p e r i o d s , and (b)
market f o r c e s need p o l i c y i n t e r v e n t i o n s f o r t h e i r
a c t i v a t i o n or for changing the d i r e c t i o n
of
t h e i r o p e r a t i o n s so a s t o move t h e s y s t e m t o w a r d s
equilibrium.
T h i s b r i e f d i s c u s s i o n makes i t c l e a r
u p t o t h e t i m e of M a r s h a l l ,
all
the
that,
prices
were t r e a t e d as f l e x i b l e . E q u i l i b r i u m between
q u a n t i t i e s demanded and q u a n t i t i e s s u p p l i e d was
e n v i s a g e d t o be a t t a i n e d b a s i c a l l y t h r o u g h p r i c e
adjustments,
t h a t i s , t h e f l e x i b l e c h a r a c t e r of
p r i c e s made e q u i l i b r i a t i n g of t h e
possible.
Introduced
supply,
treated
I t may be noted
the
inverse
Marshall
function
where demand price
as functions
that
quantities
of demand
and supply
of quantities.
b e t w e e n s u p p l y a n d demand p r i c e s
price
also
and
were
Equality
represented
e q u i l i b r i u m (Marshall, 1962).
Keynes i n t r o d u c e d p r i c e f i x i t y a n d q u a n t i t y
f l e x i b i l i t y a s t h e b a s i c i n t r u m e n t s of a n a l y s i s .
16
As a g a i n s t t h i s , ' q u a n t i t y a d j u s t m e n t '
c o u l d be
p o s i t e d w i t h t h e t r a i t of e q u i l i b r i a t i n g '
the
' d e m a n d p r i c e and s u p p l y p r i c e ' . P r o b a b l y t h e
o l i g o p o l i s t i c s t r u c t u r e of t h e c o m p e t i t i v e market
imparts t h i s f l e x i b i l i t y to q u a n t i t i e s r a t h e r than
prices.
EVOLUTION O F N E W MARKET FORMS A N D
EMERGENCE O F N E W PRICETHEORY
with
the evolution
of n e w e r
forms
and
structures of the market, the trait of flexibility
has b e e n lost by the prices of several goods and
services, prompting Hicks to distinguish between
the fix and flex price markets. The new forms and
s t r u c t u r e s of the m o d e r n m a r k e t s a l s o m a k e fix
p r i c e theory different from such strands of the
p r i c e t h e o r y as the c l a s s i c a l / n e o
classical
t h e o r y of n o r m a l p r i c e o n t h e o n e h a n d ,
and
t h e p r i n c i p l e of cost plus p r i c i n g , originally
enunciated by the Oxford Group of Economists, on
the other.
Monopoly and/or perfect/pure competition had
b e e n the d o m i n a n t a s s u m p t i o n a b o u t the m a r k e t
s t r u c t u r e p r o b a b l y from the time of A r i s t o t l e
upto the first quarter of the twentieth century,
w h e n the p e r v a s i v e influence of the classical
17
and M a r s h a l l i a n e c o n o m i c s s t a r t e d w a n i n g u n d e r
t h e i m p a c t of newly emerged e m p i r i c a l r e a l i t y of
d e p r e s s i o n and i m p e r f e c t l y o r o l i g o p o l i s t i c a l l y
c o m p e t i t i v e m a r k e t s on t h e o n e h a n d ,
effect
and t h e
of s w e e p i n g c h a n g e s t h a t t h e K e y n e s i a n
economics and newly emerging t h e o r i e s of i m p e r f e c t
and m o n o p o l i s t i c a l l y c o n ^ e t i t i v e markets r e p r e s e n t e d
on t h e o t h e r .
With
the
deepening
of
the
process
of
i n d u s t r i l i z a t i o n , t h e maturing of growth, emergence
of t h e dominance of newly
evolved
white
goods
t h e c o n s u m p t i o n and p r o d u c t i o n b a s k e t s ,
forms and s t r u c t u r e s of m a r k e t s , d i f f e r e n t
c o m p e t i t i o n and monopoly, have been
in
newer
from
evolved
almost continuously. Consequently, the received
p r i c e t h e o r y has been r e n d e r e d
inapplicable.
The p r i c e t h e o r y h a s t o u n d e r g o a l m o s t i n c e s s a n t
r e v i s i o n , u p g r a d a t i o n and even complete replacement
of t h e o l d by new p r i c e t h e o r i e s . CToaxi R o b i n s o n ' s
Theory
of
Imperfectly
Competitive
pricing,
Chcuriberlin's Theory of Mtonopolistically C o r p e t i t i v e
p r i c i n g , and T r i f f i n ' s e n d e a v o u r t o g e n e r a l i z e
Chamberlin's p r i c e theory of monopolistic c o m p e t i t i o n
reflect
the economists'
a t t e m p t s t o keep t h e
e m p i r i c a l l y o b s e r v e d r e a l i t y and p r i c e t h e o r y i n
f i n e tune with each o t h e r .
D i f f e r e n t forms and s t r u c t u r e s of t h e m a r k e t
differ
mainly
in the nature
18
and degree
of
c o m p e t i t i o n and t h e number of f i r m s i n o p e r a t i o n ,
necessitating
the
a separate
and
research
investigation
independent
price
into
theory
for
b r i n g i n g one t o one c o r r e s p o n d e n c e between
any
given
market
on the
one
hand,
a n d t h e theory
of
the
behaviour
of
and its
of prices
firms
structure
for
explanation
on the
other.
in a monopolistically
imperfectly
that
form
competitive
in a perfectly
The number of firms
market
is
even
market
competitive
operating
in the
than
of monopolistic
operate
the
with
or without
basic
hallmark
competitive
market.
oligopolistic
that
in
is a distinguishing
competition.
the
market.
feature
But oligopoly
product
of
than
market.
competitive
differentiation
or
is much lower
or purely
fewer
number
competitive
monopolistically/imperfectly
Product
The
may
differentiation,
a
mono-polistically
As a g a i n s t t h e above s t r a n d s
a n d s t r e a m s of p r i c e t h e o r y ,
O x f o r d g r o u p of
e c o n o m i s t s may be c r e d i t e d w i t h p r o v i d i n g a t h r u s t
t o t h e p r i n c i p l e of c o s t p l u s p r i c i n g .
Oxford G r o u p ' s e n d e a v o u r e n c o u r a g e d s e v e r a l
other researchers to undertake both t h e o r e t i c a l
and e m p i r i c a l
investigation
in the area
of
p r i c e s . Consequently, p r i c e t h e o r i e s f o r d i f f e r e n t
s h a d e s a n d forms of o l i g o p o l i s t i c m a r k e t w e r e
d e v e l o p e d . Economists were k e p t e n c h a n t e d by t h e s e
t h e o r i e s f o r Cfuite some t i m e . It
19
is
thus
obvious
t h a t t h e p r i c e t h e o r y has been undergoing
continuous
transformation
emergence
of new forms
structures
of the economy
evolving
price
of
ever
formation
In response
of
new
by the
almost
the
and
ways
firms.
market
the
and
to
the
and
the
consequent
practices
of
The e m e r g e n c e of
new m a r k e t forms h a s b e e n c h a r a c t e r i s e d by some
basic
factors.
MOVERS OF CHANGE I N
MARKET-STRUCTURE
T h e r e h a s b e e n a movement from t h e
small
t o w a r d s t h e l a r g e r s i z e d f i r m s . W h e r e a s many
existing
firms
have been e x p a n d i n g
their
o p e r a t i o n a l s i z e by s e t t i n g up a d d i t i o n a l p l a n t s
and m a c h i n a r y t o r a i s e t h e i r p r o d u c t i v e c a p a c i t y ,
o t h e r s have been r e s o r t i n g t o mergers and t a k e o v e r s
t o a d o p t t h e l a r g e r s c a l e s of o p e r a t i o n s . I n t h i s
p r o c e s s , t h e f i r m s s t r u g g l i n g f o r s u r v i v a l , have
b e e n c l o s e d down o r t a k e n o v e r b y t h e
larger
ones . These changes have been n e c e s s i t a t e d p a r t l y
by t h e t e c h n o l o g i c a l d e v e l o p m e n t , r e q u i r i n g e v e r
e x p a n d i n g s i z e of t h e m a r k e t , a n d p a r t l y by t h e
more i n t e n s e c o m p e t i t i o n f o r t h e g i v e n m a r k e t .
T h i s h a s r e s u l t e d i n t h e r e d u c t i o n of t h e n u m b e r
of
firms
i n t h e expanding m a r k e t s ,
transforming
the competitive into imperfectly
competitive
m a r k e t s . I m p e r f e c t l y c o m p e t i t i v e m a r k e t s had
m e a n w h i l e c o n v e r g e d towards t h e m o n o p o l i s t i c a l l y
20
competitive markets. Monopolistically competitive
markets,
in turn,
g a v e way t o
oligopolistic
markets.
As a g a i n s t t h e c o m p e t i t i v e m a r k e t s ,
high
p r o f i t s i n monopoly m a r k e t s had a t t r a c t e d o t h e r
p l a y e r s , converting the monopolistic i n t o d u o p o l i s t i c ,
d u o p o l i s t i c i n t o m o n o p o l i s t i c m a r k e t s . As a g a i n s t
this,
d u o p o l i s t i c markets converged
o l i g o p o l i s t i c m a r k e t s . Emergence
of the households'
and national
goods changed the preference
new
technology
operations
and the
saturated
despite
has been
the
rapid
to a worldwide
privatization
markets
This,
movement
worlds
integration
and
or
economies
towards
in
(Cf.
Prakash,
of
been
there
the
markets
has
led
liberalization,
in order
markets
to
of the
bring
into
close
every
scales
turn,
thereby
the
As
multi-national
towards
of national
white
of income,
and globalization
and
by
have
and exploiting
and semi-closed
century
larger
of trans
the closed
third
orderings.
growth
world.
domina.nce
economies
domestic
exploring
third
of the
warranted
the emergence
corporations,
of
had
towards
open
second
about
an
international
of
the
twentieth
1995) .
These c h a n g e s have t r a n s f o r m e d t h e n a t u r e and
d e g r e e of c o m p e t i t i o n a l s o . P r i c e c o m p e t i t i o n i s
no more a n e f f e c t i v e t o o l of s t a n d i n g u p t o t h e
21
rivals
i n t h e m a r k e t . This i s s p e c i a l l y so i n
c a s e of t h e d u r a b l e and s e m i - d u r a b l e w h i t e g o o d s .
Value
addition.
designs
Quality
and the launch
of
service,
improved
of new products
dominate
t h e c o m p e t i t i v e packages. N a t u r a l l y , t h e s e changes
h a v e i m p a c t e d upon t h e p r o c e s s e s and p r i n c i p l e s
of p r i c i n g a l s o . D i f f e r e n t s t r u c t u r e s of m a r k e t
differ
mainly
in the degree
and n a t u r e
of
c o m p e t i t i o n on t h e one h a n d , a n d t h e number of
f i r m s i n o p e r a t i o n and t h e n o n - p r i c e c o m p e t i t i o n
on t h e o t h e r ,
n e c e s s i t a t i n g t h e e v o l v i n g of
t h e s e p a r a t e and i n d e p e n d e n t p r i c e t h e o r y
for
e a c h m a r k e t form.
These c h a n g e s a l s o p e r t a i n t o t h e movement of
n a t i o n a l e c o n o m i e s from t h e i r a l m o s t
exclusive
dependence on p r i m a r y p r o d u c t i o n t o t h e dominance
of e c o n o m i c s t r u c t u r e s b y t h e
manufacturing
industries, that i s , secondary production.
t h e p r o c e s s of d e e p e n i n g of
the
range
of
In
industrialisation,
the goods p r o d u c e d
i n c r e a s i n g c o n t i n u o u s l y as the
has
been
technological
development has been f a c i l i t a t i n g t h e e v o l u t i o n
of new p r o d u c t s , new d e s i g n s and b e t t e r m e t h o d s
of p r o d u c t i o n . New t e c h n i q u e s of
production
w a r r a n t s u p e r s p e c i a l i z a t i o n and c o l o s s a l s c a l e s
of p r o d u c t i o n . I n t h e wake of t h e s e p r o c e s s e s ,
c l o s u r e s , m e r g e r s and t a k e o v e r s h a v e become t h e
o r d e r of t h e d a y . C o n s e q u e n t l y , s q u e e z i n g of t h e
22
small or l e s s e f f i c i e n t ,
and c o n c e n t r a t i o n and
c o n t r o l o v e r t h e m a r k e t by few o p e r a t o r s h a v e
e m e r g e d a s t h e d o m i n a n t f e a t u r e of t h e m a r k e t .
This
has led
industries
to the economies
and the domination
few leading-
firms.
being
dominated
of industries
byby a
Modern advanced e c o n o m i e s a r e
now b e i n g d o m i n a t e d b y t e r t i a r y
production
as the advanced c o u n t r i e s are d i s p e r s i n g
the
s e c o n d a r y p r o d u c t i o n among d e v e l o p i n g c o u n t r i e s
t h r o u g h t h e i r MNCs .
Now t h e d o m i n a n t s e c o n d a r y p r o d u c t i o n
is
g e t t i n g r e p l a c e d by t e r t i a r y p r o d u c t i o n i n t h e
d e v e l o p e d w o r l d . The a d v a n c e d e c o n o m i e s
r a p i d l y moving from t h e s t a t u s of
are
manufacturers
t o t h a t of t h e s e r v i c e p r o v i d e r s .
This
has
n e c e s s i t a t e d t h e u n d e r s t a n d i n g and e x p l a n a t i o n
of t h e p r i c i n g of t h e s e r v i c e s .
Corresponding
t o t h e emergence of new m a r k e t forms and economic
structures
theories,
and t h e above t r e n d s ,
the
t h a t have been developed
price
recently
may be c l a s s i f i e d b r o a d l y i n t o two s e p a r a t e g r o u p s :
(1) Flex
Price
Theory,
and
( H i c k s , 1 9 6 7 , 1973) .
23
(2) Fix Price
Theory
DICHOTOMOUS
MARKET
FLEX-FIX
STRUCTURES
PRICE
THEORY
B e f o r e t h e e v o l u t i o n of p o s t
modern market forms,
AND
industrial
the d i f f e r e n t
p h a s e s of
t h e t r a d e c y c l e s n e v e r r u l e d t h e economy a t t h e
same t i m e . T h i s r u l e d o u t t h e p o s s i b i l i t y
i n f l a t i o n and d e p r e s s i o n and even
of
recession
e x i s t i n g t o g e t h e r . At any p o i n t of t i m e , o n l y one
p h a s e of t h e c y c l e p r e v a i l e d . I n t h e
inflationary
c o n d i t i o n s , p r i c e s r o s e . Higher p r i c e s
in greater p r o f i t s ,
resulted
inducing the producers
to
i n v e s t and p r o d u c e more. T h i s r e s u l t e d i n h i g h e r
employment and g r e a t e r income, and
all-round
buoyancy. Depression r e p r e s e n t s a d i f f e r e n t
and
o p p o s i t e p h a s e , when d e c l i n i n g o u t p u t r e s u l t i n g
i n lower o u t p u t , l e s s employment and l o w e r income
whi.ch, i n t u r n , r e s u l t e d i n i n a d e q u a t e d e m a n d .
Firms g e n e r a l l y responded to the
inadequate
demand b y t h e l o w e r i n g of p r i c e s . The b u o y a n t
s t a t e of market evokes t h e r i s e i n p r i c e s , whereas
t h e d e f i c i e n c y of demand induces t h e f a l l i n p r i c e s .
Thus, t h e p r i c e f l e x i b i l i t y p l a y e d t h e p i v o t a l
role
i n b o t h t h e p h a s e s of c y c l e s .
But
the
in these
two
d i s t i n c t p h a s e s were o p p o s i t e . The enveloping
of
the
entire
of
the
cycle
direction
of c h a n g e i n p r i c e s
economy
at
a. given
hy
one
time
24
single
and
the
phase
opposite
directional
phases
changes
of the cycle
two phases
in prices
in the two
ruled
the coe>:istence
together
out
in the
need
all
not
the
has emerged.
pervade
a new
Inflation
throughout
sectors.
of
economy.
In t h e modern e c o n o m i e s ,
recession
distinct
facet
and
the
of
recession
economy
in
Some s e c t o r s may e x p e r i e n c e
i n f l a t i o n a r y b o u t s , w h i l e o t h e r s e c t o r s of
the
economy
The
come under
inflation
days
and recession
in so far
experience
rest
the
DEFINITION
of recession.
may thus
as some sectors
recession,
of the
grip
coexist
of
when inflation
the
these
economy
engulfs
the
economy.
OF
RECESSION
As t h e t r a d e c y c l e s h a v e b e e n a n e s s e n t i a l
component of growth, development of t h e t h e o r y of
c y c l e s and i t s
application
to analyse
the
c a u s e s and c o n s e q u e n c e s of p e r i o d i c emergence of
i n f l a t i o n a r y or d e p r es s i o n a r y p h a s e s i n
the
c a p i t a l i s t e c o n o m i e s a t t r a c t e d a t t e n t i o n of b o t h
e c o n o m i s t s a n d p o l i c y m a k e r s . The
theory
traditional
e n v i s a g e d t h e s e two p h a s e s of t h e c y c l e
t o be m u t u a l l y e x c l u s i v e , b e c a u s e i n f l a t i o n
d e p r e s s i o n c o u l d o c c u r o n l y one a t a t i m e ,
or
ruling
o u t t h e c o - e x i s t e n c e of b o t h t h e p h a s e s of
the
c y c l e a t any g i v e n time i n t h e economy.
But
25
t h e e v o l u t i o n of new m a r k e t s t r u c t u r e s
and
f o r m s and d i f f e r e n t i a l d e g r e e s of c o m p e t i t i o n ,
a s s o c i a t e d w i t h t h e s e market s t r u c t u r e s and forms,
h a v e l e d t o t h e e m e r g e n c e of a new phenomenon,
called
recession,
inflation.
which can c o e x i s t
with
O l i g o p o l i s t i c f i x p r i c e m a r k e t s and
the a t o m i s t i c a l l y competitive f l e x - p r i c e markets
now d o m i n a t e t h e modern economic s t r u c t u r e . The
t h e o r y and p r a c t i c e of f i x - p r i c e s do n o t p e r m i t
r e d u c t i o n i n p r i c e e v e n when demand i s
deficient
pressures
time
wage
from
hikes
employment
flexprlce
in the market;
continue
the
flex
and
inflationary
to percolate
to flx-prlce
rising
and primary
markets.
and
grossly
at
the
same
markets
through
Input
prices,
both
goods
markets
being
I n I n d i a n economy, i t i s t h e
i n c r e a s e i n p r i c e s of f o o d g r a i n s t h a t l e a d t o i )
wage h i k e s v i a
rise
in the cost
of
living
i n d e x , i i ) i n c r e a s e i n wage and a g r o - m a t e r i a l s '
c o s t of p r o d u c t i o n of i n d u s t r i e s i n g e n e r a l and
a g r o - b a s e d i n d u s t r i e s i n p a r t i c u l a r , and i i i )
rise
i n t h e c o s t , and h e n c e , p r i c e s of f i x - p r i c e goods
( P r a k a s h , 1985) . As wage h i k e s and r i s i n g i n p u t
p r i c e s in the general i n f l a t i o n a r y
environment
tend to r a i s e c o s t s , the f i x - p r i c e markets a l s o
r e s p o n d by r a i s i n g p r i c e s of t h e f i x - p r i c e goods,
further accentuating the e x i s t i n g
inflationary
p r e s s u r e s i n t h e m a r k e t . Then, t h e r i s i n g c o s t s
and downward s t i c k y p r i c e s of m a n u f a c t u r e d goods
26
jointly
lead
demand
in
to
the
the
emergence
market
of
as higher
deficient
priced
h a v e now t o c o m p e t e f o r t h e d e c l i n i n g
power
at
the
deficiency,
disposal
in turn,
of
in the selected markets,
to
the
demand
for
of
Thus,
such
specially
durable
or
as
semi-durable
existence
i n t h e m i d s t of
inflation
has been tending
condition
since
catering
the
emerged and t h i s
persistent
recession
non-necessities
a new p h e n o m e n o n of
demand r e c e s s i o n
has
into
Demand
specially those
w h i t e goods and other
goods.
purchasing
consumers.
culminates
goods
the
in
the
oil
world
crisis
to be
a
economy,
of
the
early
seventies.
As r e c e s s i o n
is
different
from
c o n c e p t u a l l y as well as empirically,
t o know w h a t r e c e s s i o n
is.
recession
of
the
as
rate
lower
of
than
in
These
growth
to be
economy
be
quarters
These
specially
a
of
as
r e c e s s i o n
phenomenon,
as a whole.
to
to
which
But i n r e a l i t y ,
the
the fix-price
selected
US
recessionaryare
not
envisage
enveloping
recession
sectors,
sectors producing
27
level
negative
definitions
a macro
confined
in
As a g a i n s t t h i s ,
t h e recording
of
defines
economy
decrease
cent.
d e f i n i t i o n s
o n e may l i k e
World Bank
the
to
two successive
recession
may
tends
consider
satisfactory.
the
state
2 to 2. 5 per
economists
growth
that
depression
white
goods. B e s i d e s ,
growth
rate
the
cut
to he lower
to be negative
off
point
than 2-2.5
in two Quarters
per
for
the
cent,
or
is quite
arbitrary.
The growth p e r f o r m a n c e of t h e d e v e l o p i n g w o r l d
has
been
consistently
higher
than
w h e r e a s US a n d s e v e r a l e c o n o m i e s of
this,
Western
E u r o p e , w i t h s u c h e x c e p t i o n s a s West Germany
and J a p a n and Canada, have r e c o r d e d growth a t
2 - 2 . 5 p e r c e n t d u r i n g most p a r t of t h e s e v e n t i e s
and e i g h t i e s w i t h o u t t h e r e b e i n g a t r a c e
of
recession.
Cycles have c o n t r a c t i o n a r y and e x p a n s i o n a r y
p h a s e s . C o n t r a c t i o n a r y phase succeeds t h e peak
of e x p a n s i o n a r y p h a s e b u t e n d s w i t h t h e t r o u g h .
The
severest
version
of
contraction
is
d e p r e s s i o n , w h i l e slump may be s l i g h t l y m i l d e r .
The m i l d e s t v e r s i o n of d e p r e s s i o n i s r e c e s s i o n .
' I f t h e u n d e r l y i n g growth r a t e of
output/income
i s s u f f i c i e n t l y p o s i t i v e , a r e c e s s i o n may be marked
by a f a l l i n t h e growth r a t e w i t h no a b s o l u t e
in output'
fall
( P e a r c e , 1992, Macmillan D i c t i o n a r y of
Modern E c o n o m i c s ) .
W h a t e v e r d e f i n i t i o n of r e c e s s i o n we a c c e p t
as a working p r o p o s i t i o n ,
the p e r s i s t e n c e
of
r e c e s s i o n i n some f i x - p r i c e s e c o t r s of t h e economy,
while
rest
of
the
economy r e m a i n s
under
i n f l a t i o n a r y p r e s s u r e , has thrown up new c h a l l e n g e s
28
before the business l e a d e r s . In the c o n t r o l l e d
economy of I n d i a ,
shortages,
l o n g q u e u e s and
l e n g t h e n e d w a i t i n g p e r i o d f o r t h e s u p p l y of b o t h
f l e x and f i x - p r i c e goods, s p e c i a l l y t h e w h i t e and
e s s e n t i a l o n e s , had b e e n an a c c e p t e d way of
life
t i l l t h e mid e i g h t i e s . The r e m o v a l of c o n t r o l s ,
and h e n c e , t h e i n t e n s i f i c a t i o n of
competition,
making m u l t i p l e brands e a s i l y a c c e s s i b l e t o t h e
consumers i n t h e market, and i n c r e a s e d d e g r e e
of i n t e g r a t i o n of t h e I n d i a n E c o n o m y i n
global
market
have
confronted
the
the
Indian
businessmen for the f i r s t time with the s p e c t r e
of demand r e c e s s i o n . T h e r e f o r e , s e l l i n g t h e goods
h a s become an u n p r e c e d e n t e d c h a l l e n g e . A v a r i e t y
of i n c e n t i v e s c h e m e s f o r c o n s u m e r s a r e b e i n g
e x p e r i m e n t e d w i t h by d i f f e r e n t
companies
for
r e v i v i n g t h e s l u g g i s h demand.
R e c e s s i o n i n mid s i x t i e s was c a u s e d by two
successive crop f a i l u r e s ,
r e s u l t i n g i n marked
d e c l i n e i n r u r a l incomes t h a t r e s u l t e d i n the
d e f i c i e n c y of demand f o r n u m e r o u s g o o d s . T h i s
was f u r t h e r a c c e n t u a t e d by s h o r t a g e s of
exchange,
foreign
r e s u l t i n g i n i n a d e q u a t e s u p p l y of
imported i n t e r m e d i a t e imports. This, i n turn,
led
t o u n d e r u t i l i s a t i o n of p r o d u c t i v e c a p a c i t i e s .
Natuarally,
i n c o m e a n d e m p l o y m e n t on t h e one
hand, and d e c l i n e i n o u t p u t , and h e n c e , s u p p l y on
t h e o t h e r , r e i n f o r c e d t h e r e c e s s i n a r y t r e n d . Thus,
29
r e c e s s i o n was b o t h demand d e f i c i e n c y a n d s u p p l y
s h o r t f a l l s induced, making i t s t r u c u r a l l y d i f f e r e n t
from t h e r e c e s s i o n of l a t e n i n e t i e s and t h e i n i t i a l
y e a r s of 2 1 s t c e n t u r y .
RECESSION
I N THE MIDST OF
INFLATION
The b a s i c r e a s o n b e h i n d r e c e s s i o n i s
e v e n when t h e p r o d u c e r s f a c e d e f i c i e n t
that,
demand
i n t h e m a r k e t , t h e y do n o t r e s p o n d by l o w e r i n g
t h e p r i c e s t o r e v i v e t h e demand.
Similarly,
t h e b o u t s of i n f l a t i o n e x p e r i e n c e d b y o t h e r
s e c t o r s of t h e economy n e e d n o t p e r c o l a t e t o t h e
m a n u f a c t u r i n g s e c t o r s i m m e d i a t e l y . Hence,
the
i n f l a t i o n i n s e c t o r s o t h e r t h a n i n d u s t r i e s need
n o t n e c e s s a r i l y be r e f l e c t e d i n t h e r i s i n g p r i c e s
of m a n u f a c t u r e s . I n f l a t i o n i n s e c t o r s o t h e r t h a n
m a n u f a c t u r e s may t a k e some t i m e t o s p r e a d t o t h e
i n d u s t r i e s . Then, b o t h t h e e x c e s s o r d e f i c i e n c y
of demand may be managed t h r o u g h t h e a c c u m u l a t i o n
o r d e p l e t i o n of s t o c k a n d t h e l e n g h t e n i n g
or
s h o r t e n i n g of t h e o r d e r books by t h e s p e c i a l i s e d
t r a d i n g f i r m s d e a l i n g i n w h i t e goods i n t h e s h o r t
run, while the producers w i l l respond to
excess
or
deficient
demand by
raising
c u r t a i l i n g o u t p u t in the long run.
the
or
Producers
of m a n u f a c t u r e d goods a p p r o a c h consumers t h r o u g h
s p e c i a l i s e d trading firms.
30
The specialized trading firms are the takers
and not the makers of prices in fixprice markets.
They operate as the agents of p r o d u c e r s and get
only fixed commission on sales for services they
render to the producers and consumers. The prices
a r e m a d e b y the p r o d u c e r s . C o n s e q u e n t l y ,
the
earlier theories have been rendered redundant by
such practices in actual b u s i n e s s . B e s i d e s , the
r e c e i v e d theories do not explain this existence
of r e c e s s i o n in the m i d s t of i n f l a t i o n and the
a c t u a l r e s p o n s e s of p r o d u c e r s to cope w i t h the
challenges of market in the changed context.
Another manifestation of the cleavage between
theory and empirical reality or facts is that the
demand recession is not associated with declines
in p r i c e s . Some sectoral prices remain high even
in the midst of recession, whereas numerous prices
m a y n o t rise at all in i n f l a t i o n , or these m a y
rise w i t h long time lags that too only w h e n the
cost of production registers substantial increase.
The
prices
do not
depresslonary
cycles
run cost,
norms.
In
fall
or
rise
or Inflationary
the
absence
if such sectors
phases
of Increase
conform
even
in
the
of
the
In the
to the
long
fix-price
The fixprices remain fixed as these are
tied to the long run cost. But different analysts
have analysed cost based p r i c e s on the basis of
different paradigms
(For e x a m p l e . See, W i l e s ,
31
1961, Edwards, 1965, Domberger, 1989, Means, 1972,
Prakash, 1981, 1986) .
Some apparent similarity b e t w e e n
fix-price
theory and classical theory on the one hand, and
b e t w e e n fix p r i c e theory and cost p l u s p r i c i n g
p r i n c i p l e on the o t h e r , m a y w a r r a n t
detailed
discussion. It may be appropriate to distinguish
modern fix price theory from Marshall' s long run
p r i c e theory. It is the complete flexibility of
supply
in the M a r s h a l l i a n
framework
which
k e e p s the prices fixed in the long run. This is
o b v i o u s l y q u a n t i t y e q u i l i b r i u m . B e s i d e s , as
s u p p l y is changed to m a n a g e changes in demand,
there is no c h a n g e in p r i c e s . But the q u a n t i t y
adjustment (supply) is effected only through changes
in output. There
supply
to
the
management
is
no role
changes
in
of stocks.
for
adjustment
of
through
the
demand
Besides, the assumption
of invariant technology, full capacity production
and p r o d u c t i o n scales ensures that there is no
change in the long run cost of production. Thus,
inflexible
cost
of perfectly
supply
may account
normal
price
in
for
the
the
flexible
fixity
Marshallian
long
run
of long
run
synthesis.
It
is as if the costs were fixed forever. Therefore,
the analysis implicitly assumes a static state to
prevail under which the techniques and scales of
production r e m a i n i n v a r i a n t . Static state will
32
a l s o a d m i t i n v a r i a n c e of f a c t o r s o p e r a t i n g on
demand s i d e . Management of e x i s t i n g s t o c k s a s a
c o m p o n e n t of s u p p l y h a s a l s o no r o l e . T h i s
is
d i f f e r e n t from f i x p r i c e t h e o r y , which d i s t i n g u i s h e s
s t o c k and flow components of s u p p l y .
STOCKS AND
FIXPRICES
According to f i x p r i c e t h e o r y , only long run
changes i n c o s t , r e s u l t i n g from c h a n g e s i n flow
supply
( o u t p u t ) , induce changes i n
fixprices.
F i x p r i c e t h e o r y a s s u m e s dynamic s t a t e t o o b t a i n
i r r e s p e c t i v e of s h o r t o r l o n g d u r a t i o n of
the
p e r i o d . Stock adjustments, needed mainly i n t h e
s h o r t r\an, l e a v e t h e p r i c e s unchaged. S t o c k s r e f e r
t o t h e h o l d i n g s of goods by f i r m s t o e n a b l e them
t o meet t e m p o r a r y b u t u n e x p e c t e d f l u c t u a t i o n s
in
o u t p u t o r s a l e s on t h e one h a n d , a n d demand on
t h e o t h e r . S t o c k a c c u m u l a t i o n may, h o w e v e r ,
be
p l a n n e d a s w e l l a s u n p l a n n e d . When s t o c k s a r e
a c c u m u l a t e d t o meet t h e c o n t i n g e n c y ,
contingency
i s a n t i c i p a t e d i n a g e n e r a l s e n s e . When t h i s
c o n t i n g e n c y s h a l l a r i s e and how much s t o c k s h a l l
be n e e d e d i s n o t known, and h e n c e , t h i s a s p e c t i s
u n p l a n n e d ( P e a r s o n , 1992) . D e p l e t i o n of
stock
t o c o v e r t h e g a p b e t w e e n o u t p u t and s a l e s
(flow
supply)
involves substitution
of s t o c k
o u t p u t . But a c c u m u l a t i o n of s t o c k t o f i l l
for
up
t h e g a p b e t w e e n o u t p u t and s a l e s (flow demand)
33
i n v o l v e s s u b s t i t u t i o n of s a l e s
( f l o w demand) by
s t o c k s . As s t o c k s a r e c a r r i e d f o r w a r d from one
to another period, stock r e l a t e s to
different
points
into
in t i m e . Hence,
time e n t e r s
the
s y s t e m i n a n e s s e n t i a l way, m a k i n g t h e s y s t e m
d y n a m i c . S y s t e m ' s dynamic n a t u r e a l s o r e l a t e s t o
t h e n a t u r e of s t o c k s a s g a p f i l l i n g
between
o u t p u t and flow s u p p l y o r flow demand. Changes i n
stocks lead to fluctuations
in output,
while
s t o c k s / i n v e n t o r y c y c l e s may t h e m s e l v e s b e a
f u n c t i o n of o u t p u t c y c l e s . As demand f o r o u t p u t
a r i s e s from s a l e s a n d f i r m s ' demand f o r s t o c k s
a r i s e s f o r f i l l i n g up gaps between o u t p u t and flow
demand; flow demand c a n be s a t i s f i e d p a r t l y
w h o l l y from o u t p u t ,
d e p l e t i o n of s t o c k s .
to s a t i s f y
or p a r t l y or wholly
If s t o c k s a r e
flow demand,
or
from
depleted
i t compensates
the
s h o r t f a l l s in output in the short run, while
may d e p r e s s o u t p u t i n t h e l o n g r u n , s i n c e
it
the
p r e s s u r e of e x c e s s demand i s a b s o r b e d by s t o c k s
rather
than p r i c e .
If,
accumulated to s a t i s f y
however,
stocks
are
anticipated/expected
demand, i t s t i m u l a t e s o u t p u t . But b o t h
i n t e r - r e l a t i o n s a r e s p e c i e s of d i f f e r e n t
these
genre.
S t o c k s r e l a t e t o t o t a l quantum r a t h e r t h a n t o
r a t e p e r u n i t of time (Cf . P e a r s o n , p . 219) . Stock
i s a q u a n t i t y r e l a t i n g t o an economic v a r i a b l e ,
measurement of which i s s p r e a d o v e r two p o i n t s i n
t i m e . Though i t m e a s u r e s t h e p h y s i c a l
34
quantity
a s a n e c o n o m i c v a r i a b l e e x i s t i n g a t a n y moment
i n t i m e , y e t t h i s q u a n t i t y i s o u t p u t of one p e r i o d
b u t s t o c k of a n o t h e r p e r i o d . S t o c k i s a c c u m u l a t e d
b a s i c a l l y from c u r r e n t o u t p u t ,
t h o u g h i n some
c a s e s , i m p o r t s may a l s o b e u s e d t o
accumulate
s t o c k s . In such c a s e s , s t o c k s r e l a t e not only
t o two p o i n t s
in time, these also p e r t i o n
different
in spa.ce.
points
to
The flows a r e m e a s u r e d
a s t h e q u a n t i t y of a n e c o n o m i c v a r i a b l e
that
m o v e s t h r o u g h t i m e . But o u t p u t comes i n t o t h e
m a r k e t from f i r m s and o u t p u t s h o w s a s m o v e m e n t
of q u a n t i t y p e r u n i t of t i m e .
But t h e r e a r e
b o t h i n f l o w s of o u t p u t ( s u p p l y ) i n t o t h e m a r k e t
and o u t f l o w s
(demand)
from t h e m a r k e t a s a
r a t e p e r u n i t of t i m e . O n l y o n e d i m e n s i o n of
t i m e i s i n v o l v e d t h o u g h two p o i n t s i n s p a c e a r e
involved i n such c a s e s .
As a g a i n s t t r a d i t i o n a l p r i c e t h e o r y ,
modern f i x p r i c e
theory does not r u l e out
the
the
p o s s i b i l i t y of changes i n long r u n c o s t , and hence,
the fixprices.
priority
role
The f i x p r i c e
theory
to the f l e x i b i l i t y
assigns
of
stock
component of s u p p l y i n t h e m a i n t e n a n c e of
fixity
of p r i c e s i n t h e s h o r t r u n a n d f l e x i b i l i t y
o u t p u t , the flow
r u n . The fixprice
the
cost
component
theory
of production
of supply,
does envisage
through
time.
of
i n t h e long
changes
in
Thus,
as
a g a i n s t t h e s t a t i c o r c o m p a r a t i v e s t a t i c s t a t e of
35
M a r s h a l l i a n framework,
f i x p r i c e theory admits
d y n a m i c f r a m e w o r k of a n a l y s i s .
( S e e F i g u r e 6)
Besides,
distinguishes
the fixprice
theory
b e t w e e n t h e t r a n s i t o r y and permanent components of
changes i n c o s t of p r o d u c t i o n . T h i s i s n o t t h e c a s e
w i t h M a r s h a l l ' s t h e o r y of n o r m a l p r i c e . I n t h a t
c a s e , a l l c o m p o n e n t s of c o s t a r e p e r m a n e n t .
1
Quantity/Supply
Figure: 6
36
DD's r e p r e s e n t the s h i f t i n g d e m a n d c u r v e s ,
LS
represents
the
long
run
supply
curve.
E q u i l i i b r u i m o b t a i n s at p o i n t S. O u t p u t OM is
p r o d u c e d at f u l l c a p a c i t y o u t p u t l e v e l . T h e
s h i f t in d e m a n d curve to D^D^ i n d u c e s c a p a c i t y
e x p a n s i o n w i t h the instalation of n e w but m o r e
e x p e n s i v e t e c h n o l o g y . W i t h r e f e r e n c e to the
i n i t i a l e q u i l i b r u i m c o n d i t i o n s , MM^ s h o w s the
short-falls in capacity as well as actual output
relative to new level of demand. Capacity expansion
fills up this gap but at a higher cost, and hence,
p r i c e . In the short r u n , s t o c k d e p l e t i o n w i l l
m a n a g e the excess demand at the initial cost of
full capacity output. But capacity expansion will
lead to a rise in the cost of capacity output, and
hence, price. This is different from the analysis
of static state, as shown in Marshallian diagrams
e a r l i e r . L o n g r u n m a y , h o w e v e r , c o m p r i s e of
s e v e r a l s h o r t r u n s b u t as a g a i n s t
Marshall's
a n a l y s i s in a static framework, where successive
short r u n c u r v e s c o n v e r g e t o w a r d s the i n i t i a l
long r u n h o r i z o n t a l supply c u r v e , m y approach
will represent the shift from one to another short
run" supply curve. But these short run curves will
b e traced by a rising long run cost c u r v e . The
c u r v e has b e e n depicted in above f i g u r e , w h i c h
traces full capacity supplies of different curves
in the long run at higher cost.
37
In t h e h i g h l y i n d u s t r i a l i s e d and d e v e l o p e d
e c o n o m i e s , where s e c o n d a r y and t e r t i a r y
dominate t h e economic s t r u c t u r e s ,
sectors
the process
of f o r m a t i o n of p r i c e s of most of t h e g o o d s and
s e r v i c e s conform t o f i x p r i c e b e h a v i o u r . P r i c e s of
most of t h e s e g o o d s and s e r v i c e s a r e b a s i c a l l y
c o s t b a s e d p r i c e s , d e t e r m i n e d by j o i n t management
of s t o c k a n d f l o w c o m p o n e n t s . The
pricing'
principle
formed
on the
over
cost
is
also
basis
taken
envisages
of cost,
cost
prices
while
the
plus
to
he
mark-up
to be historically
given.
T h e r e t h e s i m i l a r i t y b e t w e e n two t h e o r i e s e n d s .
Prakash, Sengupta and Chowdhury (1995) endogenised
mark-up r a t e t o determine i t w i t h i n t h e model.
B e s i d e s , t h e c o s t p l u s p r i c i n g p r i n c i p l e does n o t
furnish
any e l a b o r a t e
explanation
of
the
r e l a t i o n s h i p between c o s t s and p r i c e s . N a t u r a l l y ,
changes in cost based p r i c e s are not
explained. Unlike f i x p r i c e theory,
principle
of p r i c e s
does not
properly
cost-based
explain
c o n d i t i o n s o r p r o c e s s of e q u i l i b r i u m o r
n a t u r e of
the
the
equilibrium/disequilibrium.
WAGE COST
AND
FIXPRICES
Wage c o s t c o n s t i t u t e s a m a j o r
proportion
of t h e t o t a l c o s t of p r o d u c t i o n i n t h e a d v a n c e d
e c o n o m i e s . The wages a p p r o x i m a t e a d m i n i s t e r e d o r
fixprices,
and f i x p r i c e s r i s e d u e p r i m a r i l y t o
38
t h e r i s e i n wage c o s t i n t h e s e c o u n t r i e s .
facet
of prices
theory
Inspired
of cost-push
Inflation
developed
Inflation.
Is mainly
countries.
the enunciation
wage-push
This
of
the
The cost
Inflation
push
In
the
In t h e s e economies, wage h i k e s
a r e n e g o t i a t e d by t h e t r a d e u n i o n s on t h e b a s i s
of e x p e c t e d c h a n g e s i n p r o d u c t i v i t y a n d p r i c e
c h a n g e s i n t h e coming y e a r . T r a d e U n i o n s
their negotiations
on two
base
objectives:
(a) I n s u l a t i n g t h e i r c u r r e n t r e a l wages a g a i n s t
the expected i n f l a t i o n in future,
(b) O b t a i n i n g a h i k e i n t h e i r
and
r e a l wages
to
a p p r o p r i a t e a share i n t h e expected p r o d u c t i v i t y
gains in future.
Wages,
expectation
therefore,
of future
rise
ahead of prices
Inflation.
In
the
Consequently,
f i x p r i c e t h e o r y may r e l a t e t h e l e v e l and c h a n g e s
in p r i c e s mainly to t h e l e v e l and changes
in
wage c o s t of p r o d u c t i o n of t h e goods and s e r v i c e s
in the developed c o u n t r i e s
(For an
elaborate
e x p l a n a t i o n of t h e c o s t - p u s h i n f l a t i o n ,
See
among o t h e r s , P r a k a s h , S h r i 1 9 8 0 , 1 9 8 1 , 1 9 8 6 ,
1992) . The t h e o r y and p r a c t i c e of f i x p r i c e s have
t h u s p r o m p t e d t h e f o r m u l a t i o n of t h e c o s t p u s h
inflation
theory.
39
The conditions
are quite d i f f e r e n t
but
c o m p l e x in developing economies like the Indian
one, whose economic structures are still d o m i n a t e d
by primary production, growth process having b e e n
tertiary led notwithstanding. Besides, wage cost
does not dominate the material cost of production
in the d e v e l o p i n g e c o n o m i e s
(For e x a m p l e . See
Prakash, 1981 and 1985) .
Developing countries of the third world have
e x p e r i e n c e d the bouts of i n f l a t i o n e v e n b e f o r e
hyper-inflation and stagflation started emerging
in the economies of the
developed West. However,
inflationary pressures in the developing countries
differ
structurally
from
those
that
have
characterised the developed economies of the West
(Prakash, 19 81, Mathur and Prakash, 1981) .
One characteristic feature of the countries
of third world is that their economic structures
are highly dualistic. There are numerous layers
of d u a l i s m . Tiny developed i n d u s t r i a l sector,
based on modern technology, is surrounded by the
dominant but backward primary production. Then,
highly developed agriculture, in selected spatial
u n i t s b a s e d on g r e e n revolution technology, is
surrounded by less developed traditional agriculture
in m o s t p a r t s of the c o u n t r y . B e s i d e s , w i t h i n
m a n u f a c t u r i n g industries, there is a dichotomy
40
b e t w e e n t h e l a r g e and s m a l l s e c t o r s . W i t h i n t h e
small s e c t o r , t h e r e i s a divergence between the
o r g a n i s e d , u n o r g a n i s e d and i n f o r m a l s e g m e n t s . This
i s a n e x t r e m e l y complex s c e n a r i o .
Luckily,
Hicksian
framework
of
flex
and
f i x p r i c e s has been found t o be u s e f u l f o r a n a l y s i n g
t h e p r i c e m o v e m e n t s . A n a l y s i s of m o v e m e n t s of
p r i c e s i n t h i s framework may p r o b a b l y
facilitate
an u n d e r s t a n d i n g and e x p l a i n i n g t h e e x i s t e n c e of
r e c e s s i o n i n some s e c t o r s w i t h r e s t of t h e economy
b e i n g i n t h e g r i p of i n f l a t i o n . The f i x - f l e x p r i c e
d i c h o t o m y and t h e i r m u t u a l r e a c t i o n s t o c h a n g e s
lead to the
fact
that
cost push
inflation
g e n e r a l l y t e n d s t o be c o n v e r t e d i n t o demand p u l l
i n f l a t i o n i n due c o u r s e . The r e s u l t i s t h a t t h e
n a t i o n a l economies of t h e w o r l d f i n d i t
difficult
t o come o u t of t h e v i c i o u s g r i p of r e c e s s i o n a r y i n f l a t i o n a r y p r e s s u r e s on t h e b a s i s of t r a d i t i o n a l
policy packages.
FLEX
AND F I X P R I C E
SECTORS
The a g r i c u l t u r a l p r i c e s t e n d t o c o n f o r m t o
f l e x - p r i c e behaviour, whereas p r i c e s of manufactures
a d h e r e , by and l a r g e , t o t h e f i x p r i c e b e h a v i o u r .
But e m p i r i c a l r e s e a r c h b o t h i n I n d i a and a b r o a d
h a s f o c u s e d a l m o s t e x c l u s i v e l y on t h e a n a l y s i s of
f i x p r i c e s (For example. See, Wood and Haig, Mathur,
41
and P r a k a s h , 1981) . T h i s i s n o t s u r p r i s i n g s i n c e
t h e e c o n o m i c s t r u c t u r e of d e v e l o p e d e c o n o m i e s
a r e d o m i n a t e d by s e c o n d a r y and t e r t i a r y s e c t o r s .
Economists of t h e t h i r d w o r l d c o u n t r i e s g e n e r a l l y
a p p l y t h e t h e o r y and m o d e l s t o t h e i r e c o n o m i e s ,
d e v e l o p e d by t h e W e s t e r n e c o n o m i s t s . The c a s e
of I n d i a n economy i s q u i t e d i f f e r e n t . Only a few
s t u d i e s have focused on f u r n i s h i n g an e x p l a n a t i o n
of t h e p r o c e s s e s of t h e f o r m a t i o n of
flexprices
(For Example, See, Mathur and P r a k a s h ,
1981,
P r a k a s h , 1979, R a d h a k r i s h n a and Sarma,
1981).
Some s t u d i e s have d i s c u s s e d t h e d e t e r m i n a t i p n of
f l e x p r i c e s a t macro l e v e l . The p r o p o s e d
study
s e e k s t o f i l l - u p some of t h e gaps i n u n d e r s t a n d i n g
t h e p r o c e s s e s of
formation
of
the prices
foodgrains in India in the f l e x p r i c e
The s t u d y , t h e r e f o r e ,
of
framework.
s e e k s t o u n d e r s t a n d and
e x p l a i n t h e d e t e r m i n a t i o n of changes i n t h e p r i c e s
of a g r i c u l t u r a l goods i n g e n e r a l a n d f o o d g r a i n s
i n p a r t i c u l a r i n t h i s new framework.
T h o u g h some s t u d i e s h a v e b e e n
conducted
to analyse the a g r i c u l t u r a l p r i c e policy
(For
Example, See, T y a g i , 1986, B h a t i a , 1998, R a j b a n s ,
Kaur, 1977) , t h e g e n e s i s of changes i n a g r i c u l t u r e
p r i c e s , i n d e p e n d e n t of p o l i c y i n d u c e d movements,
r e m a i n u n e x p l o r e d , by and l a r g e .
42
The p u b l i c p o l i c y d e l i n e a t e s t h e f l o o r
of
p r i c e s of s u c h g o o d s a s a r e c o v e r e d b y s u p p o r t
p r i c e p o l i c y . These p o l i c i e s do n o t e x p l a i n t h e
a c t u a l changes above t h e minimum l e v e l s , d e t e r m i n e d
by s u p p o r t p r i c e s . Several t i m e s , s p e c i a l l y d u r i n g
t h e y e a r s of s c a r c i t y , government a g e n c i e s have
t h e m s e l v e s t o o f f e r p r o c u r e m e n t p r i c e s above t h e
l e v e l of s u p p o r t p r i c e s f o r b u i l d i n g up p u b l i c
s t o c k s ( P r a k a s h , 1986) . Most of t h e s t u d i e s
fail
t o f u r n i s h a n y e x p l a n a t i o n of s u c h f a c e t s
of
p r i c e movements. S i m i l a r l y , e v a l u a t i o n of t h e impact
of i m p o r t s of f o o d g r a i n s a n d / o r
accumulation/
d e p l e t i o n of p u b l i c s t o c k s upon t h e a g r i c u l t u r a l
p r i c e s s t i l l r e m a i n t o be e x a m i n e d o b j e c t i v e l y .
The p r o p o s e d s t u d y i n t e n d s t o t a k e up an i n - d e p t h
s t u d y of t h e p r i c e s of major f o o d - g r a i n c r o p s of
I n d i a i n t h e f l e x p r i c e framework s o a s t o d e e p e n
o u r u n d e r s t a n d i n g of t h e t h e o r y a n d p r a c t i c e of
flexprice
f o r m a t i o n on t h e o n e h a n d ,
and t o
b u i l d up an e m p i r i c a l b a s e f o r t h e e x p l a n a t i o n of
c h a n g e s i n t h e p r i c e s of f o o d g r a i n s i n I n d i a on
the other.
The d i f f e r e n c e s
inflationary
between
two t y p e s
p r o c e s s e s e x p e r i e n c e d by
of
the
d e v e l o p e d and d e v e l o p i n g c o u n t r i e s a r e embodied
i n t h e d i f f e r e n t i a l economic s t r u c t u r e s a s s o c i a t e d
w i t h t h e s e two g r o u p s of e c o n o m i e s . T h e r e f o r e ,
t h e p r o b l e m of i n f l a t i o n
43
in the t h i r d
world
countries
l i k e I n d i a may b e u n d e r s t o o d
and
e x p l a i n e d p r o p e r l y and a d e q u a t e l y o n l y i f
the
b a s i c f e a t u r e s of t h e i r economic s t r u c t u r e s a r e
explicitly
incorporated
in the
analytical
f r a m e w o r k . B e s i d e s , t h e f l e x - f i x p r i c e dichotomy
may h a v e t o be a d o p t e d t o e x p l a i n t h e e x i s t e n c e
of r e c e s s i o n i n t h e m i d s t of
inflation.
The dominance of economy by p r i m a r y p r o d u c t i o n
is
reflected
by t h e
fact
that
the
p e r f o r m a n c e of t h e economy d e p e n d s
growth
crucially
u p o n t h e g r o w t h p e r f o r m a n c e of a g r i c u l t u r e .
If
a g r i c u l t u r e s t a g n a t e s or r e g i s t e r s d e c l i n e
in
output,
t h e e n t i r e e c o n o m y s l i d e s down
the
d e v e l o p m e n t l a d d e r ( P r a k a s h a n d Raj a n , 1977) .
The t h e s i s may a l s o be s u p p o r t e d by t h e f o l l o w i n g
e m p i r i c a l r e g r e s s i o n r e l a t i o n which has been
e s t i m a t e d from I n d i a n d a t a :
Y
=2.3066+
t
=20.24
0.53X, R = = 0 . 9 4
(1)
w h e r e Y is the rate of g r o w t h of gross domestic
output in 1981 prices and x is the rate of growth
of o u t p u t of a g r i c u l t u r e in 1 9 8 1 p r i c e s . T h e
period covered is from 1961 to 2001. It is obvious
that as much as 94 per cent of total variation in
the growth of gross domestic output is explained
by this regression equation. Besides, the observed
44
r a t e of g r o w t h of r e a l GDP, i n d e p e n d e n t of
g r o w t h of a g r i c u l t u r e , i s o n l y 2 . 3 1 p e r
I t i s q u i t e in consonance with the
the
cent.
observed
f a c t t h a t t h e s m a l l e r s h a r e s of n o n - a g r i c u l t u r a l
sectors
of
t h e economy l e a v e o n l y a
small
p r o p o r t i o n of g r o w t h t o b e e x p l a i n e d by t h e s e
n o n - a g r i c u l t u r a l s e c t o r s . The I n d i a n economy h a s
b e e n g r o w i n g a t 3 - 3 . 5 p e r c e n t p e r annum d u r i n g
s i x t i e s and s e v e n t i e s and t h e r a t e h a s b e e n r a i s e d
t o 5 . 5 t o 6 . 5 p e r c e n t p e r annum d u r i n g t h e l a s t
two d e c a d e s
of
the
twentieth
century.
But
a g r i c u l t u r e h a s been r e c o r d i n g 4 t o 4 . 5 p e r c e n t
r a t e of g r o w t h d u r i n g t h e e n t i r e p e r i o d of s t u d y .
The estimated
above
annual
equation
observed
growth
are
growth
in
rates
consonance
from
the
with
these
rates.
The c o r r o l l a r y of t h i s t h e s i s i s t h a t
general
level
manufactures
of p r i c e s
and t h e p r i c e s
i n t h e I n d i a n economy a r e
g o v e r n e d a n d g u i d e d by t h e a g r i c u l t u r a l
in general
and t h e p r i c e s
of
the
of
also
prices
foodgrains
in
particular.
The f o l l o w i n g
relationship
between
the
g e n e r a l p r i c e s , p r i c e s of m a n u f a c t u r e s and p r i c e s
of f o o d g r a i n s s u l ^ t a n t i a t e s t h i s t h e s i s :
45
G W S P = 1 7 . 7 6 3 5 + 0.8220 FP
(2)
R2 = 0 . 9948 , t = 48 . 01
G W S P = 1.3705 + 0.5730 FP + 0.3882 MP
t:
(13.01)
log G W S P = 0 . 0 0 8 0 + 0 . 5 5 0 4
t:
(11.54)
+ 0.8220
(4)
R^=0.9991
(9.67)
log FP
R2=0.9959,
MP = 1 7 . 7 6 3 5
R2=0.9997
log F P + 0 . 4 3 9 7 log M P
(10.99)
log G W S P = 0 . 1 0 8 1 + 0 . 9 3 5 0
(3)
(5)
t=54.15
FP
(6)
R==0.9948,
t=48.01
Within a g r i c u l t u r e ,
foodgrains are in the
c e n t r e s t a g e b o t h i n t e r m s of a r e a and o u t p u t of
the c r o p s . Foodgrains have c o n s i s t e n t l y
been
a c c o u n t i n g f o r 7 5 . 1 1 p e r c e n t of t h e t o t a l a r e a
u n d e r c u l t i v a t i o n from 1960-61 t o 1999-2000 (Also
see,
Prakash,
1986, P r a k a s h and Goel,
1986,
Economic S u r v e y , 2 001) . B e s i d e s , t h e f o o d g r a i n s
a b s o r b t h e l a r g e s t p r o p o r t i o n of
e x p e n d i t u r e of t h e h o u s e h o l d s .
consumption
Interestingly,
consumption b a s k e t s of t h e f a r m e r s , i n c l u d i n g t h e
medium a n d l a r g e o n e s , i n t h e g r e e n r e v o l u t i o n
b e l t of N o r t h - W e s t I n d i a , a r e s t i l l d o m i n a t e d by
t h e c o n s u m p t i o n of f o o d g r a i n s ,
notwithstanding
t h e f a c t t h a t e v e n t h e s m a l l f a r m e r s of Pan j a b
46
had a r e a l p e r c a p i t a
income 1.5
times
more
t h a n t h e n a t i o n a l a v e r a g e i n l a t e s e v e n t i e s and
early eighties
(See P r a k a s h a n d Sushma,
T r i p a t h i , 1979) . P r i c e s of f o o d g r a i n s
1984,
dominate
t h e p r i c e s of a l l o t h e r goods i n t h e I n d i a n economy.
Movement of t h e g e n e r a l p r i c e l e v e l d e p e n d s upon
t h e m a g n i t u d e a n d d i r e c t i o n of m o v e m e n t s of
c e r e a l p r i c e s . T h i s i n d i c a t e s t h e r o l e of
food
p r i c e s i n t h e i n i t i a t i o n and s u s t e n a n c e
of
i n f l a t i o n . The d e g r e e and d i r e c t i o n of r e l a t i o n s h i p
between t h e foodgrain p r i c e s , p r i c e s of manufactures
a n d g e n e r a l p r i c e l e v e l may b e g a u g e d from t h e
e q u a t i o n s r e p o r t e d on p r e - p a g e (Also s e e , P r a k a s h
and G o e l , 1986) .
Equation 2 e x p l a i n s 99.5 p e r c e n t changes in
general p r i c e l e v e l . Besides, corresponding to a
u n i t (per c e n t ) change i n t h e p r i c e s of f o o d g r a i n s ,
t h e g e n e r a l p r i c e l e v e l changes by 0 . 82 p e r c e n t a g e
point. Naturally,
t o t a l e l a s t i c i t y of
general
p r i c e s w i t h r e s p e c t t o f o o d g r a i n p r i c e s h a s t o be
h i g h ; i t i s , i n f a c t , a s h i g h a s 0.94 ( E q u a t i o n 5)
which i s q u i t e c l o s e t o u n i t y .
The d o m i n a n c e of food p r i c e s o v e r t h e g e n r a l
p r i c e s i s l a s o r e v e a l e d by e q u a t i o n s 3 and 4
respectively.
I n t r o d u c t i o n of t h e p r i c e s
of
m a n u f a c t u r e s i n e q u a t i o n 2 improves t h e e x p l a i n e d
p r o p o r t i o n of v a r i a t i o n i n g e n e r a l p r i c e s o n l y
47
n e g l i g i b l y . These r e s u l t s a r e i n c o n s o n a n c e w i t h
t h e f i n d i n g s of Mathur and P r a k a s h (19 81) . Thus,
t h e r e i s s t r o n g e m p i r i c a l e v i d e n c e t o s u p p o r t my
thesis.
Another reason behind t h i s f a c e t i s t h a t the
i n d u s t r i a l s t r u c t u r e of t h e I n d i a n economy i s
still
d o m i n a t e d by a g r o - b a s e d and a g r i - l i n k e d
industries
( F o r d e t a i l s . See G o e l , 1 9 8 6 , Keya
S e n g u p t a , 1992) . P r i c e s of a g r o raw m a t e r i a l s , on
t h e one hand ( P r a k a s h and G o e l , 1986b) , and wages
of t h e i n d u s t r i a l workers on t h e o t h e r , a r e u n i q u e l y
r e l a t e d t o t h e p r i c e s of f o o d g r a i n s
1981) . Indian
economy has,
to be on food
standard
in fact,
(Prakash,
been
described
(Prakash 1986,
Prakash
a n d G o e l , 1 9 8 6 b ) . T h i s i s i n s p i t e of t h e
fact
t h a t t h e d o m i n a t i o n of economy b y a g r i c u l t u r e
has been d e c l i n i n g
through
transformation
Indian
of
the
structural
economy due
accelerated i n d u s t r i a l i z a t i o n during the
to
era
of p l a n n e d d e v e l o p m e n t s i n c e 1951.
T h i s s t u d y f o c u s e s on t h e d e t e r m i n a t i o n of
f o o d g r a i n p r i c e . Even t h o u g h t h e p r i c e
theory
h a s b e e n c o n t i n u o u s l y r e v i s e d and u p d a t e d t o
bring coherence between t h e o r y and
realities,
empirical
y e t o n l y a few a t t e m p t s h a v e b e e n
m a d e t o e x p l a i n t h e c o e x i s t e n c e of
and i n f l a t i o n .
recession
I t i s s t i l l more s u r p r i s i n g
48
that
r e c e s s i o n h a s n o t b e e n even d e f i n e d
adequetely
t o comprehend i t s p e a v a s i v e i n f l u e n c e throughout
t h e w o r l d economy. I t r u s t t h a t t h e e x p l a n a t i o n
of t h e meaning of r e c e s s i o n i n t h i s c h a p t e r w i l l
p r o v i d e d i r e c t i o n t o t h e d e b a t e s and f o c u s t o t h e
a n a l y s i s of t h e r e a l i s s u e s .
M a t h u r a n d s o m e of h i s a s s o c i a t e s
have
a t t e m p t e d t o f i l l up t h i s gap i n t h e o r y
(See
c h a p t e r on r e v i e w of l i t e r a t u r e ) . S e v e r a l
p r i c e models have been d e v e l o p e d and
fix
tested
e m p i r i c a l l y , e a c h c o n t r i b u t i n g t o move f i x p r i c e
t h e o r y towards g r e a t e r degree of comprehensiveness.
T h e r e h a v e , h o w e v e r , b e e n n o t many w o r t h w h i l e
a t t e m p t s t o move f l e x p r i c e t h e o r y t o w a r d s a
having
had
hones,
been
enriched,
Radhakrishna
flesh
and blood.
The hony
provided
by Hicks,
which
to
extent,
some
and Shri
Prakash
by
theoryskeleton
has
been
Mathur,
R.
and t h e s c h o l a r s
who worked u n d e r t h e i r s u p e r v i s i o n and g u i d a n c e .
T h i s s t u d y i s a modest a t t e m p t t o f i l l
some of t h e i d e n t i f i e d gaps i n t h e e x i s t i n g
p r i c e framework.
up
flex
The f o l l o w i n g a r e t h e m a i n
o b j e c t i v e s of t h i s s t u d y :
1.
To r e c o n s t r u c t f l e x p r i c e t h e o r y on t h e b a s i s
of s t u d i e s c o n d u c t e d so f a r and u s e t h e same
a s t h e b u i l d i n g b l o c k s t o f i l l up t h e gaps s o
49
t h a t a comprehensive t h e o r e t i c a l
explanation
of f o o d g r a i n p r i c e s i n f l e x - p r i c e
framework
i s provided;
2.
To e v o l v e a priori
of
conceptual
explanation
flex p r i c e s with a view to
converge
t o w a r d s an e v o l u t i o n of f l e x p r i c e t h e o r y ;
3.
To t e s t
empirically
the
structure
of
f l e x - p r i c e theory with data, e s p e c i a l l y those
r e l a t i n g t o p r i c e s of f o o d g r a i n s i n I n d i a n
Economy;
4.
To examine e m p i r i c a l l y t h e b e h a v i o u r of s t o c k s
a n d c o n s u m p t i o n of f o o d g r a i n s
to i n t e g r a t e
t h e same i n t h e
in
order
flex-price
structure.
The f o l l o w i n g
chapter
scheme s h a l l
be
followed in the study:
The s t u d y h a s b e e n d i v i d e d i n t o 8 c h a p t e r s .
The b r i e f o u t l i n e s of d i f f e r e n t c h a p t e r s ,
the f i r s t ,
CHAPTER
except
a r e g i v e n below :
2
W i l l f o r m u l a t e t h e Models and w i l l
focus on t h e Methodology of t h e study.
Computable General E q u i l i b r i u m Model
of the Food Economy w i l l be formulated
50
and d i s c u s s e d
in this
M e t h o d s of p a r a m e t r i c
chapter.
estimation
w i l l a l s o be h i g h l i g h t e d ,
wherever
necessary.
CHAPTER
3
C o v e r s t h e r e v i e w of
literature.
S e l e c t e d models of f i x p r i c e s and a
few s t u d i e s of f o o d g r a i n p r i c e s , t h a t
h a v e some t h e o r e t i c a l
or
policy
framework, have b e e n r e v i e w e d i n
o r d e r t o h i g h l i g h t t h e n a t u r e and
d i m e n s i o n of t h e c o n t r i b u t i o n t h a t
my s t u d y a t t e m p t s t o make .
R e s u l t s of t h e e m p i r i c a l a n a l y s i s of
the
v a r i o u s h y p o t h e s e s and t h e m o d e l s f o r m u l a t e d i n
t h e s t u d y w i l l b e d i s c u s s e d i n C h a p t e r s 4 , 5, 6
and 7 .
CHAPTER
4
Will
deal
with
the
growth
d i s p o s a b l e income and
of
aggregate
c o n s u m p t i o n . B o t h t h e p r i m a r y and
s e c o n d a r y d a t a a r e p r o p o s e d t o be
used in the study.
CHAPTER
5
W i l l d e a l w i t h t h e a n a l y s i s of t h e
interface
between
poverty
and
c o n s u m p t i o n of f o o d g r a i n s w i t h a
51
view t o t e s t t h e v a l i d i t y of Engel' s
Law and g e n e r a l i s e t h e same.
An a t t e m p t w i l l be made t o f o r m u l a t e and t e s t
t h e m o d i f i e d v e r s i o n of t h e E n g e l ' s Law i n t h e
c o n t e x t of t h e c o n s u m p t i o n b e h a v i o u r w i t h r e g a r d
to the foodgrains in India.
CHAPTER
6
Will
focus
on t h e
Procurement,
D i s t r i b u t i o n , P r i c e s of F o o d g r a i n s
and Food S e c u r i t y i n I n d i a .
CHAPTER
7
W i l l focus on t h e a n a l y s i s of Market
arrivals,
stocks
and p r i c e s
of
foodgrains.
CHAPTER
8
W i l l focus on t h e a n a l y s i s of s t o c k s
P r o c u r e m e n t and P r o c u r e m e n t P r i c e s
a n d t h e i r i n f l u e n c e on p r i c e s of
foodgrains.
CHAPTER
9
W i l l c o n t a i n t h e C o n c l u s i o n s and
Resume of t h e s t u d y .
The c h a p t e r s s h a l l b e f o l l o w e d b y
select
r e f e r e n c e s / b i b l i o g r a p h y and s t a t i s t i c a l a p p e n d i x .
52