Question

2. Identify and explain the characteristics of a farmer in the farming industry that would operate under a perfect competitive market model, in terms of entry, exit, price control, profit-making, and production efficiency

Answer 1

A perfectly competitive model is characterized by the following.

(1) There are numerous buyers and numerous sellers (farmers).

(2) Each farmer sells identical goods, therefore demand for single farm's output is perfectly elastic.

(3) Each farm is too small to control the market, so they accept market price as their own price. Farms are price-takers.

(4) Entry and exit are free.

(5) In short run, firms will make economic profit (loss) if the market price is higher than (lower than) farm's average total cost. But in long run, each farmer will earn zero economic profit.

(6) In long run equilibrium, all existing farms will produce at the lowest point of their average total cost curve. Since average total cost is minimized, production is efficient in long run equilibrium.