Question

a)Suppose the market equilibrium price of wheat is Rs.2 per bushel in a perfectly competitive industry. Draw the industry supply and demand curves and the demand curve for a single wheat farmer. Explain why the wheat farmer is a price tracker. b) In which form of market structure would price be the key factor when competing? Explain why?

Answer 1

Answer:

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Answer 2

Answer:

a) The vertical axis measures the price of wheat and the horizontal axis measures the quantity of wheat. The upward sloping curve S is the supply curve of wheat and the downward sloping curve D is the demand curve for wheat.

b) The vertical axis measures the price of wheat and the horizontal axis measures the quantity of wheat. The straight line parallel to the quantity axis is the demand curve for the wheat. An individual farmer in a perfectly competitive market is a price taker as indicated by the horizontal demand curve of the farmer. The reason for this is, that an individual farmer cannot influence the price of wheat (price tracker).

Explanation:

Given: The market equilibrium price of wheat is Rs.2 per bushel in a perfectly competitive industry.

To find: Draw the industry supply and demand curves and the demand curve for a single wheat farmer. Explain why the wheat farmer is a price tracker. In which form of market structure would the price be the key factor when competing Explain why

Solution:

• a) In the graph below, the horizontal axis shows the number of bushels of wheat and the vertical axis shows the price per bushel of wheat.
• The supply curve is upward sloping, QS and the demand curve is downward sloping QD. The point where both curves intersect is the equilibrium, e and the price at this point is $2$ per bushel.

• b) The market of wheat comes under perfectly competitive due to its homogeneous product because wheat cannot be distinguished from one farm to the other. Thus, none of the farmers can have an edge in the market and therefore all are price takers in the market on the basis of the type of wheat they are producing. As the bushels of wheat are not unique and if any of the farmers try to raise the price will have an adverse effect and will lose all the demand as the market has a perfectly elastic demand curve.
• The key characteristics for a perfect competition firm with reference to the farmers are the $Price= 2=Demand = Marginal revenue$ or we can say that the farmer has a perfectly elastic demand and it is a price taker.
• The graph for a single farmer will look like this: