The wheat market

The wheat market

Introduction

A market is a meeting point for both buyers and sellers, and through their interaction, they determine the price of a set of goods. A market structure is defined by the number of producers, ease of entry or exit, type of product and the degree of market power held by the producers. Most businesses around the United States operate under different types of market structures such as perfectly competitive, monopoly and oligopoly. A perfectly competitive market is defined as a market structure whereby there is a large number of independent firms that produce the same product. This type of market structure is common in the agricultural sector, for example, wheat farming.

What makes the wheat market perfectly competitive

The market for wheat is considered perfectly competitive because it has many different producers (farmers), and no individual producer can change the market price by either increasing or decreasing his/her output. According to the book Essential Economics by Hubbard and O’Brien (2015), other characteristics that make the market for wheat perfectively competitive are;

• The produce is homogenous (wheat).
• Producers (farmers) enter and exit the market without any restrictions.
• Buyers and sellers do not incur any other costs when trading.
• Buyers and sellers have detailed information on the quality, price, production process and utility.

Wheat farmers don’t worry about the price of wheat because it is already predetermined. A perfectly competitive producer is called a price taker because the pressure of competing firms forces them to coincide with current prices in the market.  For example, if a wheat farmer wants to know the current market prices for wheat, he/she checks on the internet.

The market Demand curve for the wheat market

The demand curve for a perfectly competitive market is a horizontal line equivalent to the equilibrium price of the entire market. Moreover, the price of wheat is determined by the intersection of the market supply and demand curves, where the marginal value of the last unit purchased is equivalent to the marginal cost of the last unit produced. The demand curve for a single producer is different from a market curve because the market demand curve slopes downwards, whereas the single producer’s demand curve is a horizontal line.

The market demand curve slopes downwards because when the price of wheat increases, the quantity demand decreases. On the other hand, the demand curve for an individual producer is a horizontal line, which shows that the elasticity of demand for the wheat is perfectly elastic. Perfectly elastic means that once demand forces and market supply have determined the wheat price, individual producers become price takers and are forced to switch to the equilibrium price of the market. Failure to do that, consumers will buy wheat from other producers charging a lower price.

If an individual producer tries to increase his/her market share by lowering the price, he/she will make negative profits. This means for an individual producer to make a profit in a perfectly competitive market, he/she is required to sell his/her goods at market price. Any attempts to increase the market share by lowering the price will result in massive losses.

Work Cited

Hubbard, R G, and Anthony P. O’Brien. Essentials of Economics, Global Edition. Harlow, United Kingdom: Pearson Education Limited, 2015. Internet resource.

Hubbard, G G. A. L. P. O. B. T. Essentials of Economics. Pearson, 2015. Print.