Page 154 - DECO405_MANAGERIAL_ECONOMICS

Unit 9: Market Structure – Perfect Competition

Notes
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 the Depression. Subsidies to farmers have been a part of the American agricultural
system 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

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