The production agriculture is a good example of
perfect competition. In my case, corn is in the perfect competition for several
reasons. First of all, the number of firms is large but more than the oligopoly
structure (McAlesse 2004). This is because buyers can easily find
replacement sellers and sellers can generally find replacement buyers.
Secondly, corn farmers are price takers. They have no control of the price of
corn so there is no non-price competition against their competitors. Thirdly, corn
itself is a homogenous product. One seller's product can easily be substituted
by another similar product. As a result, advertising the corn does not make a
difference, so the main factor influencing who the buyers are willing to buy
from based on the price the seller is asking. Fourthly, the barriers to entry
are low. There are limited restrictions to enter or exit the industry because
they do not require advertising, control of resources, networking or strict
government regulations. Fifthly, the information of the corn industry is
perfect. The fact that corn is very common; the information is readily
available regarding the market opportunities and production technology of the
corn industry. Sixthly, resources of the industry are very mobile (Varun 2012).
The resources are easy to move from this industry to an alternative use like
the low capital, seeds, and scarecrows. On the other hand, the factors that
influence the level of competition in corn industry are production and
transportation technology. The technology used to produce corn has great impact
on the market because it raises the level of competition in the industry. As
for transportation, it increases the number of buyers and sellers in a market
since it allows businesses to move crops around the world. Relating to the
article, this explains why the corn industry is considered as "aggressive"
competition between Brazil and the US for the share of the world exports
because it satisfies the characteristics as a perfect competition (Agrimoney 2013).
Moving on, we look into the economic profit
and revenue of perfect competition in the corn industry. Graph (a) represents the industry/market and graph (b)
represents a single corn farmer. First of all, the total profit is the
total revenue minus total costs (TR-TC). The price of the corn is not
determined by that one corn farmer but determined by the market as a whole. If the one corn farmer set the price any higher than
the equilibruim price set by the market (Pe), the one farmer cannot sell any
corn. However, if the same farmer set the price any lower than then market
equilibrium price, every single corn buyer would want to buy from that one corn
farmer. So, the main point is the price of an individual corn farmer is
perfectly elastic which explains why graph (b) is an horizontal line at the the
market equilibrium price (Pe) because he has no control of the price of corn.
In addition, this line is not only the demand but also represents the marginal
revenue. If the corn farmer increases the input or decreases the output, it has
no effect on the market price (Parkin, 2012). The sames goes for the average revenue because no matter how much he/she
sells corn, it remains constant. After that, the profit maximization for
perfect competition is produced at the Q in which marginal revenue equals
marginal costs (MR=MC).The corn farmer increases the second additional
unit because the revenue is more than the increase in costs due to that second
additional unit, the firm will decide to produce the second extra unit because
its profit increases. But once the MC>MR, this is when the firm suffers loss
from producing additional unit mainly due to the diminishing marginal of
returns (McAlesse 2004). So basically, if the corn farmer is producing below the profit
maximization point he can increase profits by increasing output (MR>MC) and
if he is producing above the point he can reduce
the outputs it in order to increase total profit (MR<MC). Hence, ecnomic
profit is maximized when MR=MC.
In the short run, when
the corn farmer suffers loss, that does not mean he is necessary to shut down production (Parkin, 2012).
The firm only stop production when it reaches the shutdown point (P= min AVC).
It is also the point at which the MC curve intersects the AVC curve at its
minimum as shown below. This is because when the firm cannot even cover the
basic cost needed for production. Variable costs like material, labor,
utilities, and delivery costs of corn. At this point, the firm is indifferent
between producing more corn and shutting down temporarily.
Apart from that, we look further into the
long run and short run in the corn industry. On the top is the corn market and
on the bottom is the diagram of an individual corn farmer. At the profit
maximization point (MR=MC), the price equals minimum cost and marginal cost (P=MC
and minimum ATC). Since the average revenue minus average total cost equals
zero (AR-ATC = 0), this means this firm is breaking even because it is not
making an economic profit (Sloman 2004). Due to the fact the firm has low
barriers to entry; the corn farmer is not expected to earn economic profit
especially in the long run. But if the demand of corn in the market increases,
consequently, the individual corn farmer will increases its output in order to
gain economic profit (AR>ATC) as shown in the highlighted area. However, in
the long run, because of the increase in economic profits; new firms are
attracted to enter the market. So, there is an increase in the supply of corn,
therefore firms experiencing profits in the short run will fall back to the
original price in the long run (Pe). The same theory goes to the economic
losses by corn farmers. In the short run, when exist a decrease in demand of
corn, individual corn farmer will suffer economic losses (ATC>AR) so the
firm will reduce the output (Sloman 2004). However in the long run, firms that continue
production will eventually eliminate the losses because demand will increase
due to the exiting corn farmers in the industry. The market will continue to
make a series of new low (Agrimoney 2013). Relating to the article, it states
that due to the dry season, safrinha corn production has decreased and might
suffer losses, but this is just the short run, if safrinha were to continue
their production in the long run, they will cover their losses in the short
run.
In a perfect competition, each firm makes
zero economic profit in the long run (Parkin, 2012). So at the price (P), each
firm is producing the quantity (Q) at the lowest possible long-run average
cost( P= min LRAC). This means the firm is productively efficient. Productive
efficiency is when the corn farmer produces corn in the least cost manner.
If the individual corn farmer wishes to produce more, it further increases the output resulting in the diseconomies
of scale. There will be an increase in the per-unit costs of corn if the farmer produces beyond the
point. Therefore, if they increase the output they can sell at a lower price to
undercut competition. The firms all start to produce more and reduce their
prices until all the firms reach constant returns to scale. That is when if you
produced any more average costs would rise. At the same time, the corn farmer
is allocatively efficient because the marginal social benefit equals to the
marginal social cost (MSB=MSC). The demand curve is equal to the marginal
utility curve, the benefit while the supply curve is equal to the marginal cost
curve. Unlike the other market structures, perfect competition is very fair
because no externalities exist like pollution,
the distribution of income, etc (Parkin, 2012). This means that the
demand curve is also equal to the social benefit of the additional unit, while
the supply curve is equal to the social cost of the additional unit. Hence, the
market equilibrium, whereby demand meets supply, is also where marginal social
benefit meets marginal social costs. At this point, net social benefit is maximized;
this means the allocative efficiency is achieved.
Under such conditions, no reorganization of production in the market will make
anyone better off without making someone worse off. This indicates that
the consumers of corn are willing to buy at the same level as producers are
willing to sell. In perfect competition, this explains why price is equals to
marginal cost(P=MC) since demand equal the price. At the price, both consumer and
producer surplus are
maximized
References:
Agrimoney.com. (2013 )Corn price - Brazil crop hopes fuel downbeat talk
on corn price [Online] Available at:http://www.agrimoney.com/news/brazil-crop-ideas-fuel-downbeat-talk-on-corn-price--5864.html.
[Accessed 01 June 2013].
McAlesse, D. (2004) Economics for Business. Third Edition, Prentice Hall.
Parkin, M. (2012) Economics. Tenth
Edition Global, Pearson.
Sloman, J. (2004) Economics for
Business. Third Edition, Prentice Hall.
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