Question

2. Assume that this garlic market is perfectly competitive. This time, something else has changed in the market. The cost of picking garlic has decreased because a new and better garlic picking machine has been invented. Explain how a perfectly competitive market responds (a) explain the way the curves shift and why (b) explain how profits or losses occur, and how that affects the dynamics of the market. (c) explain what happens to efficiency throughout (d) explain how this change would affect a garlic farmer that did not use the new and better garlic picking machine.

Answer 1

a. The marginal cost curve line, which is horizontal and parallel to the x-axis in case of a competitive market will shift down. This curve shifts down parallel to the original curve and the equilibrium quantity of garlic will thus increase

b. There will be an economic profit. This will be measured by the rectangular area that is formed between the old Marginal Cost curve and the new marginal cost curve.

c. There will be an increase in efficiency because now at a reduced cost, more quantity of garlic will be produced.

d. This will reduce the profit levels of the other garlic farmer, and will force him to run-out of the market if he is unable to compete with the lower-cost and thus lower-priced garlic that is produced by the farmer who uses the new machinery.