Page 156 - DECO101_MICRO_ECONOMICS_ENGLISH

Unit 10: Market Structure – Perfect Competition

the Depression. Subsidies to farmers have been a part of the American agricultural system Notes
ever since. Bill Clinton attempted to reduce payments and increase diversity of crops
with the Freedom to Farm Act in 1994. In 2000, however, the Farm Security and Rural
Investment Act restored the farming subsidies. While it is true that some farmers struggle,
the government spent $30 billion dollars in subsidies yearly, even though it is estimated
that it would only cost $10 billion dollars in crop insurances and other measures to bring
the poorest farmers in America up to middle class. On May 14, 2002, President Bush signed
a farm subsidy estimated to cost $190 billion dollars over ten years, rekindling a national
debate about subsidies. Today, large commercial farms dominate the agricultural market;
8% dominate 72% of sales.
Farm policies are sometimes more the product of politics than economics. While security
of the food supply and preservation of small family-owned farms are good goals,

well-intentioned programs might be hugely inefficient. There are cost-effective ways of
helping small farmers, including crop insurance, but today some of these measures are
still not used.
Questions
1. Compare the earlier global agricultural scenario with the recent scenario (as depicted
in the case)
2. Do you agree that agriculture is a perfectly competitive industry?
Source: www.ehow.com

10.4 Supply and Demand Together

The following three conditions exhibit how adjustment is likely to take place in the firm and in

the market under different situations.
Market Response to an Increase in Demand

Faced with an increase in demand which it sees as an increase in price and hence profi ts, a

competitive firm will respond by increasing output (from A to B) in order to maximise profi t (Figure

10.10). As all firms increase output and as new firms enter, price will fall until all profit is competed
away. Thus the long run supply curve will be perfectly elastic as is S in (a). The fi nal equilibrium
LR
will be at the original price but a higher output. The original firms return to their original output

(A) but since there are more firms in the market the market output increases to (C).
Figure 10.10
P P
MC
AC
S SR
B
B

P P
A
C
P 0 S LR P 0
A
D 1
D
Q Q
0 0
Q 1 Q 2 Q Q 1
Q
(a) Market (b) Firm

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