ECONOMICS U$A
Episode 17

PERFECT COMPETITION
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.
a) 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.
b) 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:
a) subsidizing foreign demand for U.S. agricultural products.
b) buying part of the "surplus."
c) encouraging farmers not to produce (acreage restriction programs).

KEY ECONOMIC CONCEPTS:
elastic supply and demand, demand elasticity and total revenue, inelastic supply and demand, price stability and elasticity, unitary elasticity, short-and long-run elasticity,
income elasticity, farm price supports, cross-price elasticity perfect competition
price=marginal cost efficiency

Contemporary Issues Perfect Competition and Inelastic Demand

In 2001 and 2002, the American auto manufacturers offered 0% financing for the purchase of new cars. These incentives – which amounted to prices cuts for cars – were put in place in response to sluggish growth in the U.S. economy and rising inventories of unsold cars. The results were quite dramatic. Car sales rose as consumers rushed to take advantage of "an offer they could not refuse". What can the behavior of consumers, in light of these incentives, tell us about the price elasticity of demand for cars?

For a complete transcript of this video program download TVpdf#17

The Farmers Plight
At the beginning of WWI, President Woodrow Wilson challenged the nation’s farmers to dramatically increase food production. During the outbreak of WWI there was a great drive put on to increase feed supplies to feed not only our army and civilian population but populations in Europe that had been overrun. Even after the War, the farmer raised his output even higher and fed Europe in a "relief effort." The demand was strong and profits great. Small farmers prospered.
But in 1921, the nation lurched into a post-war recession and European agriculture recovered more quickly than anticipated. Demand for the farmers’ crops fell. Yet supplies remained abundant. Prices plummeted. Attempting to raise their income, farmers produced more.
The more that was produced, the more surpluses piled up. As demand abroad continued to decline, more surpluses piled up, until eventually there was a chronic surplus situation. The surplus drove market prices down, and more only the most efficient farmers could meet the cost of production. In less than a decade, more than one and a quarter million hard-working farmers were forced to leave their homes and their land.

Comment and Analysis by Richard Gill
Farmers in the 1920’s were too productive for their own good. During the 1920’s the laws of supply and demand were telling our farmers that there was too many of them. And the way this lesson was being taught was through sharp declines in farm pries and farmers’ incomes. It was a case of supply out-running demand.
Dairy Farmers Strike
No group of farmers suffered more than the dairymen of the mid-western states during the Great Depression. Dairy production was at its highest level ever. Milk prices fell, but lower prices failed to increase consumption. So the dairy farmers’ income dropped to its lowest level ever.
The farmers were selling milk to milk dealers. So that the milk dealer could pick and choose from dairy farmers, and if a dairy farmer didn’t want to sell his milk at the price the milk dealer was offering, then the milk dealer would tell the farmer to keep his milk at home.
As the dairy farmer income fell, they found themselves poised to rebel. A strike was called with the target of Sioux City, Iowa. Each individual dairy farmer thought that if he could just deprive the milk dealer of his milk supply for a while, that the milk dealer would come to terms at a higher price for the dairy farmer.
It was a violent strike, but ultimately unsuccessful because the milk dealers could find enough milk supply somewhere to thwart the desires of the dairy farmer, so there didn’t seem to be much the farmers could do to improve their general lot.

Comment and Analysis by Richard Gill
It made sense on one hand for the dairy farmers to try to curtail milk supplies on the market. But the demand for milk is inelastic meaning the consumer demand for milk doesn’t change that much whether the price is high or low. If you can keep milk production off the market you can get very large increase in prices. However these kind of schemes are difficult to work in a competitive environment.
Government Subsidy
Until 1933, the US government maintained the hands off attitude toward agriculture. However, as the Great Depression brought new desperation to farmers, Franklin Roosevelt’s New Deal sought to help the farmer. For the first time there was a national program to raise farm income by guaranteeing minimum prices for farm goods. New Deal programs managed to save hundreds of thousands of farmers from destitution, but the problem of surpluses would not go away. Farm price supports conspired to raise farm output even further. By the latter part of the 20th Century, the demographic stuation had changed dramatically. Where in the first half of the century a majority of the population was in farming, now the agriculture industry was in the hand of a few large firms. In 1996 President Clinton signed the Freedom to Farm Bill, which was supposed to wean farmers from agricultural subsidies. But finding the right combination of policies that would keep consumer prices for food products low while withdrawing subsidies has been elusive.

Comment and Analysis by Nariman Behravesh
There has been a large array of federal farm programs over the past several decades, attempting to deal with basic imbalances of supply and demand. But farm policies often has more to do with politics than economics and though the subsidies are inefficient and hugely expensive they are hard to remove. In addition, there are few nations, including the US that wish to depend on others for their food supply, or on the vagaries of Mother Nature. There are, however other more cost effective alternatives of helping the poor farmers... if only politics would not get in the way.