Imagine a farmer is growing peaches in a perfectly competitive market.  What happens to the quantity and price of peaches that he grows if he discovers a new technology that reduces the cost of...

Imagine a farmer is growing peaches in a perfectly competitive market.  What happens to the quantity and price of peaches that he grows if he discovers a new technology that reduces the cost of growing peaches?

What is the answer to question 51

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Asked on by lkballer24

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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In this case, Cyril will be able to sell more peaches and will be able to do so at a price that is at least somewhat lower than that of his competitors.  This will only be true in the short run and it will also only be true if we assume that Cyril has the means (land, machinery, etc) to grow more peaches.

In a perfectly competitive market, all of the peach growers are charging the same price.  At that price, they are making zero economic profit.  This means that the peach growers could not possibly charge a lower price without losing money.  They can sell essentially as much as they want to at the market price, but they cannot charge a lower or a higher price.

Cyril’s invention changes this for him.  He can now produce peaches at a lower price.  He should lower his price as much as it takes to get all of the peach buyers that he can handle to buy from him.  He should not lower his price any further than that because he would then not make as much profit as he could.  Cyril will also be able to sell as many peaches as he can produce.  Buyers will have no reason to buy from others because all the producers are selling a homogeneous product.  The buyers will buy from Cyril because the only difference between his product and that of his competitors is that his is cheaper.

Thus, in the short run at least, Cyril will produce more peaches and sell them at a slightly lower price.

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