Ftcom june 1 2010 there is no better fertilizer than

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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 900 835 950 Quantity (millions of metric tons) 0 7,500 8,000 8,350 9,000 9,500 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 s s In perfect competition, many firms sell identical products to many buyers; there are no restrictions on entry; sellers and buyers are well informed about prices. 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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This note was uploaded on 01/10/2013 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue University-West Lafayette.

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