Question

After reading the chapter on perfect competition, think about the markets listed below and discuss how close/far these markets could be to be perfecct competitive markets. Exlain why?

• Agritgultural Products, commodities such as corn and wheat
• Unskilled Labour (it means the occupations that could be filled by individuals who have not finished high school or only have a High School Degree

Answer 1

a. Agricultural products, commodities like corn and wheat market are an example of perfect competition..The same crops ( wheat, corn) that different farmers grow are homogeneous products. Demand curve of agricultural products are pefectly elastic at existing price. There are large number of sellers and buyers in agricultural market. Entry and exit are free under agriculture market. Wheat and corn farm are likely to exist as a price taker. If wheat or corn farm earns super normal profit in short run, new farmers will come to the market and starts farming. It will reduce the share of existing farmers. The demand curve faced by farmer is also equal to marginal revenue of farmer. Then all firms only earns normal profit. Farmer will maximise the profit when marginal revenue is equal to marginal cost
b. Unskilled labor market is also closely related to perfect competitive market. Supply curve of labor is perfectly elastic at existing market wage. Each firm is price taker fixed by the industry. For one firm, changing the quantity of labour it hires does not change the wage. The supply curve of labour is also the marginal factor cost curve for unskilled labor. Firm will earn profit when marginal cost curve intersects marginal product curve for labor.