Question

Demand and Supply in Perfect Competition Cows are munching down zucchini, yellow squash and cabbage that Southern Valley Fruit and Vegetable farms grew and picked for restaurants and other institutions. It’s one way the company is trying to make use of the glut of south Georgia vegetables caused by the closure of dining spots, schools and other big buyers. South Georgia farmers ship food from Florida to Canada, but the closures cost them 40- to 50% of their market. Growers are caught between being unable to sell all their crop and selling what they can in a flooded market with dropping prices.

1. Draw a demand and supply diagram that illustrates the changes taking place in the vegetable market. Explain any changes you draw.

2. Assume vegetable farms operate in a perfectly competitive market. Draw a cost and revenue diagram that shows the effect on farms profits of “dropping prices”

Answer 1

Sol :

1: Due to closure of dining spots , schools and other big buyers demand for the vegetable especially zucchini , yelow squash and cabbage. As, due to this , the growers are unable to sell the crop due to decrease in demand and supply remaining the same.

Due to decrease in demand , price becomes lower than before. so , this will be shown by shift in demand curve to the left.

Effect of shift of demand curve to the left :

• When demand decreases due to closures , demand curve will shift to the left
• Dcerease in demand over the supply remaining the same , creates a market of excess supply
• Excess supply will put a pressure on the prices of the goods.
• So, ultimately , New equilibrium is established at the point at lower prices and greater quantity.

2. If , Vegetable Farms Operator works in a Perfectely Competitive Market, then it is a price taker firm . So, Profit maximising situation is the point where MR = MC and MC is increasing after that point.

but , Due to decrease in prices and increase in cost , firm's profit dwindled (Reduced) than before .

As, Closure of market also increases the cost and decreases the prices ,

So, in the diagram given below , MC shows the Initial Marginal Cost and MC1 Shows the new Marginal Cost whereas P shows the new price line and P1 shoes the initial Price line.

shaded area is equal to the loss of profit due to change in the Prices of the goods.