Let us say that the peach industry is in perfect competition. Then one farmer invents something that allows peaches to be grown more cheaply. What happens to the peach market when other farmers...
Let us say that the peach industry is in perfect competition. Then one farmer invents something that allows peaches to be grown more cheaply. What happens to the peach market when other farmers adopt this invention?
What is the answer for 51. b)
When Cyril invented the new technology, his prices dropped a little and his production increased. When the rest of the industry adopts Cyril’s invention, the prices for the industry as a whole will drop to a point where no one is making any economic profit. The quantity of peaches that is produced will presumably rise to some degree, though that will depend on things like consumer tastes and the prices of substitute goods.
When the industry as a whole adopts the new technology, the price of peaches will drop to the point where no peach farmer is making an economic profit. This is because there are so many peach farmers, all selling the same product, that the competition will drive prices down as low as they can possibly go. This price will be lower than the price that Cyril was temporarily able to charge because he was no longer in perfect competition when he had sole possession of the new technology.
When the price of the peaches drops, the quantity of peaches sold by the industry as a whole should increase to some degree. As peach prices drop, people are more likely to switch to peaches from other substitute goods such as nectarines.
Thus, in the long term, Cyril’s invention causes prices in the peach industry to drop and it causes more peaches to be grown.