1.Draw a suitable corn market and an individual farmer demand and supply diagrams to illustrate the initial situation in the corn market where all farmers are earning normal profit.
2.Examine and explain the effects on price and quantity of the corn market as well as the profit and output of the individual corn farmer in the short run. Support your answers with a suitable firm and market diagram.
3.What will happen to your answers in (b) in the long run? Explain with a suitable firm and market diagram.
1.It is apparent that the given corn market is a perfectly competitive market where there are number of small sellers who are essentially price takers. Also, the number of buyers is also large. The requisite graph for normal profits is indicated below (Mankiw, 2014).
It is apparent from the graph on the left which highlights the corn industry dynamics where based on the industry demand and industry supply the equilibrium price Pe has been decided. The individual farmers would have to sell their corn at the same price. Since the price charged is higher than the ATC at the point of intersection of MR=MC, hence there is an economic profit made which is the shaded area. The above represents the case of profit maximisation in case of a perfectly competitive market (Nicholson & Snyder, 2011).
2.Based on the efforts of the government and also the research report, there would be an increase in the demand for corn but the short term supply would remain constant. As a result , the market price would increase in the short term and hence the farmers would earn higher profits. The requisite diagram for the same is indicated below (Mankiw, 2014).
It is apparent that the demand curve shifts on the right leading to increase in price from P1 to P2. As a result of increased price, supernormal profits are realised by the farmers which is indicated in the form of the shaded area which has increased and occupied area between P1 and P2 (Nicholson & Snyder, 2011).
3.In a perfect competition, there are no entry barriers. As a result, owing to the incentive in the form of supernormal profits from corn, more farmers would start producing corn which would lead to a higher supply and in the long run, the economic profit earned from corn by the farmers would be zero (Mankiw, 2014). This is indicated in the following diagram.
It is apparent that in response to the increased demand, the supply has increased which causes a lowering to price. The price eventually leads to a point where the ATC = Price as indicated. At this point no economic profit is made and the market enters a equilibrium (Nicholson & Snyder, 2011).
Mankiw, G. (2014), Microeconomics (6th ed.), London: Worth Publishers
Nicholson, W. & Snyder, C. (2011), Fundamentals of Microeconomics (11th ed.), New York: Cengage Learning