Question

Many people – including retailers, hawkers and consumers buy their fresh produce at one of the National Fresh Produce Markets (NFPMs) in South Africa. Most of the fresh fruit and vegetable producers supply their products to these NFPMs. The price of potatoes varies daily because the price is determined by supply and demand, as one would expect in this type of market structure. Prices are displayed to the buyers and sellers of potatoes at the fresh produce markets and this is the way in which potatoes are marketed. Due to the daily fluctuations in the supply and demand of potatoes, the producers, like the consumers, are never sure about the price they will receive for their products. For this type of market structure to function efficiently, all role players in the market need perfect information on the supply and demand. The Fresh Produce Markets display the supply levels for all fresh produce traded on the market so that prices can quickly be changed if the supply changes. The Fresh Produce Markets therefore provide daily market information which gives market signals to all stakeholders (producers, retailers, hawkers and consumers). This information enables all role players to make strategic business decisions daily. Adapted from Roos A (2017) Economics, An Introduction, 2nd Edition Pearson

3.1 Discuss the type of market structure the scenario illustrates in terms of the three specific market characteristics being discussed.

3.2 If the economic profit of firms operating in this market structure act as an incentive for new firms to enter the industry, explain and illustrate with the aid of a diagram, the long-run profit maximizing situation of firms in this industry.

Answer 1

1)According to the market characteristics discussed in the above question this market structure refers to perfect competition market. cause here every stakeholders have all the information about the quantity supplied and the fluctuation of the daily price thus it is a perfect information market which is only possible in perfect competitive market. Daily price is settled by the market itself depending upon the quantity demanded and quantity supplied thus both the producers and the consumers are price taker in the economy. a large number of NFPM supply the homogeneous identical goods( fresh fruit and vegetables) just like perfect competitive market.

2) The present firms in the market are now earning positive economic profits which will allure other firms to entry in the market as there is free entry and exist available for the firms in the perfect competitive market.with the entry of new firms in the market, the price of the good will fall as there is an increasing supply of the good due to increasing number of the firm.Along with this, cost will go up as the result of more intensive competition of factor of production. The firm will continue entering in the market until the price is equal to the average cost thus each firm in the market will earn zero profit or normal profit in the long run.