A farm will earn only a normal profit if it is in perfect
competition. Many textbooks give farms as a possible example of this market
structure.
In perfect competition, the firms (or in this
case farms) are producing a homogeneous product. That means the produce from one farm
is just the same as that from another so buyers will not prefer one farm to
another.
In perfect competition, it is easy for new firms
to start up.
If you put these two together, you can see why
the farm earns only a normal profit. If a farm is earning economic profit, others will
see that and they will want to farm as well. Since it is easy to get started, more
farms will spring up. Since the product is homogeneous, buyers will not prefer any
farm's products so the prices will have to be the same for all
farms.
This means that the prices that all farms receive
will have to go down if they are making economic profit. If economic profit is made,
more farms enter the market. They drive the price down until only a normal profit is
made.
No comments:
Post a Comment