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Corn price decrease in a Perfectly Competitive Market
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PriceOf
Corn(Market)
Quantity of Corn (Market)
P e = $7.00
10000
D*
S*
Market for Corn
P f =$7.00
MC*
ATC*
Firm (Farmer Jones)
10
Quantity of Corn (Firm)
PriceOf Corn
(Farmer Receives)
“A”“A”
The Market for Corn is represented by the graph on the LEFT.
The Firm and its Cost Curves are represented by the graph on the RIGHT.
“Pe” is the Market Price at $7.00 and “P f” is the price (same $7.00) the Farmer receives per bushel of Corn
At this PRICE the Market Quantity (Qs=Qd) is 10,000 and the Firm Quantity Supplied is 10
PriceOf
Corn(Market)
Quantity of Corn (Market)
P e = $7.00
10000
D*
S*
Market for Corn
P f =$7.00
MC*
Firm (Farmer Jones)
10
Quantity of Corn (Firm)
PriceOf Corn
(Farmer Receives)
“A”“A”
In a PERFECTLY COMPETITIVE Market the PROFIT MAXIMIZING (or LOSS MINIMIZING) QUANTITY is where:
Marginal Revenue = Marginal Cost
“MR=MC”
Point “A” on the Firm Graph on the RIGHT at a Quantity of “10”
ATC*
PriceOf
Corn(Market)
Quantity of Corn (Market)
P e = $7.00
10000
D*
S*
Market for Corn
P f =$7.00
MC*
Firm (Farmer Jones)
10
Quantity of Corn (Firm)
PriceOf Corn
(Farmer Receives)
“A”
ATC*=$3.50 “B”
“A”
To determine the profitability of the Firm we now have to locate the “Average Total Cost” (ATC) to produce 10 bushels of Corn.
From Point “A” we drop DOWN to the ATC curve and label that Point “B”.
At Point “B” we go over to the Price axis and see that the ATC of producing 10 Bushels of Corn is $3.50
ATC*
PriceOf
Corn(Market)
Quantity of Corn (Market)
P e = $7.00
10000
D*
S*
Market for Corn
P f =$7.00
MC*
Firm (Farmer Jones)
10
Quantity of Corn (Firm)
PriceOf Corn
(Farmer Receives)
“A”
Economic Profit
ATC*=$3.50
“A”
The Farmer receives $7.00 per bushel, but the ATC of each bushel is $3.50.
Price minus ATC = Economic Profit per Bushel.
The BLUE area is represent the Area of Economic Profit
Economic Profit = Total Revenues MINUS (Explicit Accounting Costs PLUS Implicit Opportunity Costs)
ATC*
“B”
PriceOf
Corn(Market)
Quantity of Corn (Market)
P e = $7.00
10000
D*
S*
Market for Corn
P f =$7.00
MC*
Firm (Farmer Jones)
10
Quantity of Corn (Firm)
PriceOf Corn
(Farmer Receives)
“A”
Economic Profit
ATC*=$3.50
“A”
This is a NICE position for the Farmer to be in. He/She is making an Economic Profit of $3.50 for EACHBushel of Corn Produced.
Remember: Economic Profits are the profits in EXCESS of Revenues minus the total of EXPLICIT and IMPLICIT (Opportunity Costs) Costs.
ATC*
“B”
PriceOf
Corn(Market)
Quantity of Corn (Market)
P e = $7.00
10000
D*
S*
Market for Corn
P f =$7.00
MC*
Firm (Farmer Jones)
10
Quantity of Corn (Firm)
PriceOf Corn
(Farmer Receives)
“A”
Pf 1 = $3.50P 1=$3.50
“B”
11000
S 1“A”
Economic Profit
The year 2014 is expected to produce a bumper crop of Corn. The SUPPLY of Corn is expectedto INCREASE significantly.
The Market Supply Curve for Corn will shift to the RIGHT (Shown on the Market Graph on the LEFT)
This will serve to DECREASE the Market Price for Corn, hence the PRICE the Farmer will receive as well.
ATC*
“B”
PriceOf
Corn(Market)
Quantity of Corn (Market)
P e = $7.00
10000
D*
S*
Market for Corn
P f =$7.00
MC*
Firm (Farmer Jones)
Quantity of Corn (Firm)
PriceOf Corn
(Farmer Receives)
“A”
P f 1-$3.50P 1=$3.50
“B”
11000
S 1“A”
Here is the tricky part. We STILL want to conform to the PROFIT MAXIMIZING (LOSS MINIMIZING) Rule
MR = MCAt our new price of $3.50
POINT “C”
ATC*
“B”“C”
10
PriceOf
Corn(Market)
Quantity of Corn (Market)
P e = $7.00
10000
D*
S*
Market for Corn
P f =$7.00
MC*
Firm (Farmer Jones)
10
Quantity of Corn (Firm)
PriceOf Corn
(Farmer Receives)
“A”
P f 1-$3.50P 1=$3.50
“B”
11000
S 1“A”
The New PROFIT MAXIMIZING QUANTITY will be 9 Bushels of Corn at a Price of $3.50
To find out how the farmer is doing profit-wise we need to locate the ATC of Producing 9 bushels of Corn
We drop down SLIGHTLY from Point “C” to Point “D”
ATC*
“B”“C”
9
“D”
PriceOf
Corn(Market)
Quantity of Corn (Market)
P e = $7.00
10000
D*
S*
Market for Corn
P f =$7.00
MC*
Firm (Farmer Jones)
10
Quantity of Corn (Firm)
PriceOf Corn
(Farmer Receives)
“A”
P f 1-$3.50P 1=$3.50
“B”
11000
S 1“A”
We see that the ATC is about $3.40 to produce each of those 9 bushels. The Price is $3.50 so the farmer is making a SLIGHT PROFIT of $.10
on each bushel of Corn (GOLD AREA)
ATC*
“B”“C”
9
“D”ATC 1= $3.40Economic Profit
PriceOf
Corn(Market)
Quantity of Corn (Market)
P e = $7.00
10000
D*
S*
Market for Corn
P f =$7.00
MC*
Firm (Farmer Jones)
10
Quantity of Corn (Firm)
PriceOf Corn
(Farmer Receives)
“A”
P f 1-$3.50P 1=$3.50
“B”
11000
S 1“A”
The Farmers Dilemma.
The price they received decreased much faster relative to their costs of producing Corn.
If we insert the old Area of Profit (BLUE AREA) at the previous Price we can easily see what has happened to Farm Profits.
$.10 versus $3.50 per bushel of Economic Profit.
ATC*
“B”“C”
9
“D”ATC 1= $3.40Economic Profit
Economic Profit
