Question

Suppose the market for carrots is perfectly competitive and operating at a long-run equilibrium in the early 1900s . Then, in the 1920s, many farms are being equipped with machinery that makes the amount of labor needed for farming much lower. In turn, farming carrots has become cheaper. 1)How would this affect the market for carrots, how about the individual cost curves for the carrot farm (marginal cost, avg. variable cost, avg. total cost?) 2)What about the individual supply curve for a carrot farm? 3)Finally, and most importantly, what will happen to the price of carrots in the long-run as a result of these changes?

Answer 1

The introduction of machinery that reduces the cost of farming carrots leads to a decrease in the individual farm's cost curves and a rightward shift in the supply curve. This causes the market supply to increase and, in the long-run, pushes the price of carrots down to a level where firms make zero economic profit.

Step-by-step explanation:

Introduction of machinery in the 1920s that reduced labor requirements would lead to lower costs for farming carrots. This technological advancement would decrease the marginal cost (MC), average variable cost (AVC), and average total cost (ATC) curves for an individual carrot farm. The individual supply curve for a carrot farm would shift to the right, indicating that the farm could supply more carrots at each price level, due to the reduced costs of production.

As a result, in the long-run, the price of carrots in a perfectly competitive market would decrease. Short-run profits generated by the lower costs would attract new firms into the market, increasing the overall supply. Eventually, the entry of new firms and the expansion of existing firms would continue until the economic profits are zero, which is the point where price equals the minimum of the long-run average cost curve (ATC).

This is called the zero-profit equilibrium in perfectly competitive markets. Therefore, in the long-run, the introduction of machinery and the subsequent decrease in costs will lead to a lower price for carrots, benefitting consumers, but leaving firms with no economic profit.