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Unit 4 — Perfect Competition/Inelastic Demand

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Purpose:

To illustrate the concepts of perfect competition and the elasticity of supply and demand.

Objectives:

  1. A competitive industry (or market) is one in which there are many independent buyers and sellers. No one firm or consumer affects a large percentage of the market.
  2. Market pressures will force competitive firms to use the least costly method of production and force them to expand production up to the point at which the marginal cost of production equals the market price. (This results in an efficient allocation of resources.)
  3. Elasticity is defined as the percentage change in one economic variable, such as sales of automobiles, divided by the percentage change in a related variable, such as the price of automobiles.

    1. If the price elasticity of demand is very low (inelastic) there will be large changes in price when there is a sudden increase or decrease in supply.
    2. The degree of elasticity depends on the length of the time interval over which it is measured. Elasticities will generally be greater if firms and consumers are given more time to respond.
  4. The government has attempted to maintain farm incomes by trying to keep agricultural prices from falling too low. Government programs have tried to support prices by:

    1. subsidizing foreign demand for U.S. agricultural products.
    2. buying part of the “surplus.”
    3. encouraging farmers not to produce (acreage restriction programs).

Audio and Transcripts

Meet the Series Experts

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Wayne Rasmussen

Wayne Rasmussen

Chief Historian at the U.S. Department of Agriculture in the 1980s.

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Brian Reidl

Brian Riedl

Budget Analyst and Grover M. Hermann Fellow in Budgetary Affairs at the Heritage Foundation, specializing in interpreting, explaining, and reforming federal budget policy.

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  1. If the market demand curve for a given commodity—say beef—shifts upward and to the right, this is an indication that...

    consumers want more of the commodity at the current price.

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  2. The price elasticity of demand is essentially a measure of how...

    sensitive market demand is to changes in price.

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  3. Checking figures provided by the U.S. Department of Agriculture, we find that the estimated price elasticity of demand for canned tomatoes is 2.5, while the estimated price elasticity of demand for corn is .5. These figures suggest that...

    market demand for corn is not very much affected by price.

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  4. Which of the following factors is probably MOST important in determining whether the price elasticity of a given product is high or low?

    Other factors could be pertinent to some extent, though the first factor is the most significant. Length of time on the market is probably not directly related except to the extent that it allows consumers to become better acquainted with the product. Similarly, money spent on advertising provides only a general clue since we don’t know how consumers know that the product is high quality — or whether that is a factor influencing sales. They may claim to care about quality, but actually use some other criterion in selecting an item for purchase; for instance, designer jeans may outsell other jeans that are more durable but less stylish.

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  5. Which of the following statements regarding the demand and supply curves for farm products is MOST accurate?

    The demand curve has tended to shift very slowly to the right, and the supply curve very rapidly to the right.

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  6. The expression “the farmer is a price taker not a price maker” refers to the fact that...

    in perfect competition, no one producer can control prices.

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Glossary

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