Page 155 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes However, once the price falls below AVC it will pay to shut down (point A). In that case, the

firm’s loss from producing temporarily and save the variable cost. Thus, the point at which
MC = AVC is the shut-down point (that point at which the fi rm will gain more by temporarily
shutting down than it will by staying in business. When price falls below the shut-down point,

the average variable costs the firm can save by shutting down exceed the price it would get for

selling the good. When price is above AVC, in the short run, a firm should keep on producing
even though it is making a loss. As long as a firm’s total revenue is covering its total variable cost,

temporarily producing at a loss is the firm’s best strategy because it is making less of a loss than
it would make if it were to shut down.

Case Study Economic Analysis of Agriculture
rony is the nature of the economics of agriculture; even as many in America still struggle
with hunger, the government has been offering subsidies to the American farmer to
Iartifi cially raise the price of produce, in some cases since 1933.

History of Subsidies
Because a typical farmer is so small compared to the entire market for the good he or she offers,
they cannot affect the price of the good, or try to affect the price of good too effi caciously.
Instead, they are referred to as ‘price takers’, who are forced to accept the market price.
However, subsidies alter this economic situation to occasionally illogical results. At the end
of World War I, farmers were rewarded by high prices as the government spent millions to
rebuilt war-torn Europe. In fact, a small farmer who might have been almost forced to sell
the farm before the war was in fact currently quite successful. However, in 1921, the nation
fought through a recession as the farm goods they fervently produced outpaced demand,
probably due to Europe’s quick agricultural recovery. American farmers now suffered,
and continued to do so into 1922, where virtually every industry had recovered except for
agriculture. Large lands that had been opened up to feed Europe’s millions pumped out
more and more crops, but prices went lower and lower, and a surplus quickly accumulated
that prevented prosperity.
Rising Anger of Farmers
Farmers could no longer meet the cost of production, and many were forced to leave their
farms. Under neo-classical theory, this could be considered a frictional unemployment
situation; as each farm increases production until it doesn’t take as many to cover the market,
some of them should switch to other tasks. This ‘message of the market’ was a message
of sadness for many farmers. During the Great Depression, farmers were especially hurt.
For example, low dairy prices due to increased production meant that Midwestern dairy
farmers were earning less than ever. Milk, as a highly spoilable good, is a good example
of ‘perfect competition,’ when farmers can only earn the price the market tells them. Even
dairy farm strikes were ineffective, like those as a part of the Farmer’s Holiday Association
Strike of 1932 in Wisconsin and Iowa (some of these became violent as milk haulers and
milkmen scuffed on the picket lines).
Since the 1930s
FDR worked to create a national program to guarantee income to farmers by enacting
a significant number of measures to raise prices, beginning with the creation of the

Agricultural Adjustment Administration in May 1933, which began the subsidy system
that continues to this day, even though the AAA was declared unconstitutional in 1936. The
AAA measures paid landowners to leave part of their land fallow. This did raise farmers’
incomes, but consumers were forced to endure high food prices during the worse years of
Contd...

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