Question

Hi, I want you get a clear and short opinion about the question is below. Please try to give me clean opinion so I can understand the case and if you can provide me the explanation with a different example I will be happy about it. Thank you very much for the time that you will be spending on this question. Peace!

When biofuels like ethanol started to be encouraged, many farmers expected high returns because of increased demand for corn, which enticed many farmers to grow more corn or start growing corn instead of another crop. What do you think would happen to the profitability of corn farmers in the short and long run in the this situation, considering the perfectly competitive nature of the corn market?

Answer 1

Perfectly competitive market is a market structure where sellers sell identical products and they are price takers( they don't decide the price) and no competition exists.

In the above case, farmers have realised that the usage of ethanol will increase their returns and the farmers have decided to forgo every other crop and grow corn.

In the short run, due to increase in demand for the crops, the farmers will earn economic profits. As there is a demand in market and there is an ample amount of production.

In the long run, as there is no barrier for entry and exit in the perfect competition, and consumers will have perfect information as well. There will be many farmers producing the same crop i.e corn, but none of the farmer can attain enough power to sustain the profit in the sales of the corn which will result in the no profit no loss condition.