Textbook Problem

Farmers are often heard to complain about the high costs of machinery, labor, and fertilizer, suggesting that these costs drive down their profits. Does it follow that if, for example, the price of fertilizer fell by 10 percent, farming (a highly competitive industry with low barriers to entry) would be more profitable? Explain.

To determine

The effect of high cost of machinery, labor, and fertilizers in changing profit of farmers.

Explanation of Solution

In the short run, the lower resource price will make profit in the market. This is because in the short run only a small number of firms share the market share and they will sell the product above their average cost. However, in the long run, many firms are sharing the market share because of the non-barriers to entry. Then, the profit in the market becomes zero due to the decrease in demand, which resulted from excess supply of goods. Also, the earnings from the production will only cover the cost. Therefore, lowering the resources price will not change the market profit in the long run. However, it will help the farmers to survive in the market. This is because in the long run, the firms with the highest cost of product can easily drive out from the market.

Economics Concept Introduction

Perfect competitive market: Perfect competition is the market with large number of sellers and buyers dealing with identical products.

Price takers: If a firm is said to be a price taker, it will accept the prevailing price in the market.