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Microeconomics Perfect Competition

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Microeconomics Perfect Competition

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  • April 9, 2013
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Perfect Competition of Wheat Crops and Variable Cost
Basic theme
Farmers gamble on deciding what crop to grow from year to year because variable costs can make it difficult for a farmer to break even and make profit. Critical Review
Farmers who decided to grow wheat crops in winter are predicted to see profit this spring based on the estimated costs. Farmers have to almost blindly decide on which crop might be most profitable for them to grow because their total variable costs are always changing. In the article it showed that for Red Spring Wheat, the combination of fixed costs and variable costs would create a loss for some farmers. Despite having higher than normal variable costs, the farmers cannot raise their prices to cover their total costs because in perfect competition the seller’s price is set by the market equilibrium price, giving consumers the ultimate purchasing power. If one farmer did not do well in covering their total costs because of variable costs, they cannot recover their costs by increasing price and therefore are price takers. Farmers have a large number of competitors with identical products and can’t differentiate their products through advertising to create buyer preference. The most difficult option a farmer has is to minimize their average variable costs and maximize output efficiently within their production possibilities curve. The article suggests the best option for farmers is to minimize their fixed costs by investing in cheaper land and cheaper used equipment instead of new equipment. The demand curve for an individual farmer is relatively elastic as a change in price can affect their demand dramatically as many identical substitutes are available to consumers. If market’s equilibrium price increased then the change in quantity demanded for wheat would be inelastic because it is a necessity. The demand for an agriculture product in pure competition like wheat is usually constant as consumer demand never usually changes...