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Unformatted text preview: that caused the first global food crisis in 30 years in 2007–08 has led to
large increases in production of foods such as corn and wheat. Farmers have responded to
higher prices. ...
The U.S. Department of Agriculture said ...“Higher prices, and thus expanded acreage, in
combination with favorable weather, have helped production expand sharply.”
Global corn production will hit 835m metric tons in the 2010–11 season, its highest ever
level, the USDA forecasts. ... That is likely to lead to a period of relatively stable prices. ...
While prices for the main food and feed grain crops—corn, wheat, and soybeans—are likely
to remain steady and low in the next year or so, that does not mean a repeat of the food crisis
is impossible. ...
One argument against that view holds that
technological gains in response to the crisis
have boosted productivity, making farmers
more able to deal with increasing consumption. ESSENCE OF THE STORY But analysts ascribe the gains in productivity
more to fortunate weather conditions than a
revolution in farming technology. ...
Copyright 2010 The Financial Times. Reprinted with permission. Further
reproduction prohibited. 214 In 2010–11, global corn production will reach
its highest ever level at 835 million metric tons. s High prices in 2007–08 led to large increases
in the acreage of corn and wheat. s Favorable weather also helped to increase
production of these crops. s Prices for corn, wheat, and soybeans will likely
remain low next year, but a future price rise
might occur. s A revolution in farming technology would
increase production without raising costs and
prices. s Some crops, such as corn, saw record yields in
the 2009–10 season and the USDA is predicting high yields for next year as well. s The current gain in productivity is most likely
the result of fortunate weather and likely to be
temporary. 000200010270728684_CH10_p195-220.qxd 6/23/11 4:13 PM Page 215 ECONOMIC ANALYSIS
s The global market for corn is competitive and the
model of perfect competition shows how that market
works. s s s During 2006 through 2008, increases in demand
brought a rising price and an increase in the quantity
of corn supplied. In 2009 and 2010, good weather conditions increased the supply of corn. By 2010–11, the supply
curve had shifted rightward to S1. The price fell to
$230 per metric ton and production increased to 835
million metric tons. s In 2009 and 2010, good weather conditions brought
an increase in the supply of corn and the quantity of
corn increased further but its price fell. Back on the farm in Fig. 2, the lower price decreased
marginal revenue and the MR curve shifted downward
to MR1. s But the fortunate weather increased farm productivity
and lowered the cost of producing corn. The average
total cost curve shifted downward to ATC1 and the
marginal cost curve shifted downward to MC1. s The combination of the lower price and lower costs
might leave the farm with an economic profit. In Fig. 2
we’re assuming that the farm again made zero economic profit. s If farms did make a positive (or negative) economic
profit, entry (or exit) would eventually return them to a
zero economic profit position like that shown in Fig. 2. s From 2006 through 2008, the supply curve of corn
was S0 in Fig. 1. The demand for corn increased and
by 2008, the demand curve was D. The price of corn
in 2008 was $310 per metric ton and 800 million metric tons were produced. s In 2008, the farm faced a marginal revenue curve MR0
and had average total cost curve ATC0 and marginal
cost curve MC0 in Fig. 2. s The farm maximized profit by producing 8,000 metric
tons and (we will assume) made zero economic profit. 500 S0
S1 400 310 230
200 Price and cost (2010 dollars per metric ton) Figure 1 illustrates these events in the market for corn
and Fig. 2 their effects on an individual farm. Price (2010 dollars per metric ton) s 500 MC0 MC1 400 ATC0 MR0 310 ATC1
230 MR1 200 D
0 750 800 Figure 1 The market for corn 900
Quantity (millions of metric tons) 0 7,500 8,000 8,350 9,000
Quantity (metric tons) Figure 2 A corn farmer 215 000200010270728684_CH10_p195-220.qxd 216 6/23/11 4:13 PM Page 216 CHAPTER 10 Perfect Competition SUMMARY
Key Points Output, Price, and Profit in the Long Run
(pp. 205–207) What Is Perfect Competition? (pp. 196–197)
s In perfect competition, many firms sell identical
products to many buyers; there are no restrictions
on entry; sellers and buyers are well informed
A perfectly competitive firm is a price taker.
A perfectly competitive firm’s marginal revenue
always equals the market price. Working Problems 1 to 3 will give you a better understanding of perfect competition. s s s s s The firm produces the output at which marginal
revenue (price) equals marginal cost.
In short-run equilibrium, a firm can make an economic profit, incur an economic loss, or break even.
If price is less than minimum average variable cost,
the firm temporarily shuts down.
At prices below minimum average variable co...
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