Question

Australia’s east coast drought will cut next season’s Canola production. But if rain returns, the crop could bounce back the following season. The global price of Canola is forecast to rise as a result of the fall in production.

1. The market for Canola, it could be argued, follows the required features of a perfectly competitive market. List three features of an “idealized” perfectly competitive market that apply to the market for Canola.

2.Describe the canola market as a whole and the cost and revenue of one farm in 2020, assuming that all firms are making zero economic profit. Use well labelled graphs to assist your explanation.

Answer 1

1. A perfectly competitive market is when individuals offer an identical product and firms can easily enter and exit the market as there are no barriers to entry and exit. There are numerous number of sellers in the market. Thus the three features which apply to the market for Canola, are free entry and exit, great number of market players, such as farmers who are prevalent in the market for Canola, plus they sell identical products.

2. Canola is used in biodiesel production and restaurants use it as Canola is advantageous for human health. Per acre of Canola gives out 40 bushels. As all firms are making zero economic profit, the cost should be equal to the revenue of one farm in 2020. Now the cost of production of one farm is $400 per hectare. Thus the revenue should also be $400.

Thus the breakeven point is where marginal cost and marginal revenue is equal which is $400 and there is no economic profit.