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Economics U$A: 21st Century Edition
Perfect Competition/Inelastic Demand (Microeconomics)
Economics USA: Perfect Competition/Inelastic Demand Video Transcript
Economics USA: Perfect Competition/Inelastic Demand Audio Transcript
Farmers lured into producing massive food surpluses for WWI could no longer profit when the war ended and demand plummeted. After 1933, President Franklin D. Roosevelt sought to improve the conditions of farmers via policies in his New Deal plan. Government subsidies later allowed for corporate ownership of a majority of farmers. The Freedom to Farm Bill of 1996 gave farmers a little more maneuverability, but for the most part farmers are still held to the fluctuating demand statuses of large competitive firms.
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Unit Overview
Purpose:
To illustrate the concepts of perfect competition and the elasticity of supply and demand.
Objectives:
- 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.
- 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.)
- 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.
- 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.
- 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.
- 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:
- subsidizing foreign demand for U.S. agricultural products.
- buying part of the “surplus.”
- encouraging farmers not to produce (acreage restriction programs).
Meet the Series Experts
Wayne Rasmussen
Chief Historian at the U.S. Department of Agriculture in the 1980s. Born on a farm in Ryegate, Montana, he became a surveyor for the General Land Office and an accountant for the Corps of Engineers. He moved east in search of advanced education and work, finding both in Washington, D.C., where he became the Dean of Agricultural Historians and served eleven Secretaries of Agriculture over a fifty-year period. He was the author of A History of the Emergency Farm Labor Supply Program, 1943–47. Dr. Rasmussen received his B.A. from the University of Montana and M.A. and Ph.D. from George Washington University.
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. His writings exposed the beginnings of a federal spending spree that was pushing federal spending to dangerous limits; his budget research has been featured in front-page stories and editorials in the New York Times, the Wall Street Journal, the Washington Post, and the Los Angeles Times. He has discussed budget policy on the major networks, and he participates in the bipartisan “Fiscal Wake-Up Tour” of town hall meetings that focus on the crisis in Social Security, Medicare, and Medicaid. Before joining Heritage, he worked for former Wisconsin Governor Tommy Thompson, former Representative Mark Green (R-WI), and the Speaker of the Wisconsin Assembly. Mr. Riedl received his B.A. from the University of Wisconsin and his M.A. in Public Affairs from Princeton University.
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Quiz Addendum
2. Answer explanation:
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.
Glossary
- cross-elasticity of demand
The percentage change in the quantity demanded of one commodity resulting from a one-percent change in the price of another commodity. May be either positive or negative. - demand elasticity
Responsiveness of consumer preferences to a change in price, with all other factors held constant. - elastic supply and demand
Consumers’ and/or producers’ willingness and ability to produce or consume goods and services, subject to changes in prices or incomes. - farm price supports
Maintenance of costs for a raw material or commodity, usually through public subsidy or government intervention. - income elasticity of demand
The percentage change in the quantity demanded of a commodity resulting from a one-percent increase in total money income (all prices being held constant). - inelastic supply and demand
Changes in price have very small effects on consumer and producer preferences. - perfect competition
A market structure in which there are many sellers of identical products, no one seller or buyer has control over the price, entry is easy, and resources can switch readily from one use to another. Many agricultural markets have many of the characteristics of perfect competition. - price inelastic
The demand for a good if its price elasticity of demand is less than one. - price stability and elasticity
Prices in an economy don’t change over time, which should, in turn, have very little effect on consumer preferences. - price=marginal cost efficiency
Measuring the effect that a change in total cost, arising when the quantity produced changes by one unit, has on price. - short-run and long-run elasticity
Measures in the response to price movements; long-run measures total response, and short-run measures immediate response. - short run
In the context of Chapters 15 to 20, the period during which at least one of a firm’s inputs (generally its plant and equipment) is fixed. - unitary elasticity
A price elasticity of demand equal to one.
