Competitive Market: Farm Income and Costs Research Paper

Connecting the farms in the US to the concept of the perfectly competitive market, the definition and the characteristics of such a market should be outlined. The main characteristics of a perfectly competitive market include the availability of many buyers and sellers, identical products, and the absence of barriers to entering the market. These main characteristics can be reflected in US farms, where there are large numbers of buyers and sellers in this industry, and accordingly, there is a change in market entrants annually, e.g. “[t]he estimated the number of farms in the U.S. in 2007 were revised from 2,088,790 to 2,204,950” (Economic Research Service). Additionally, it can be seen that the output of each farm in the US, is very small relative to the overall production numbers, and thus, each participant in the market being insignificant to the market in general, is an indicator of the perfectly competitive market. In terms of income and costs, a perfectly competitive market implies a long-run competitive equilibrium, where the entry and the exit of firms, results in zero economic profit in the long run. In that regard, the farming industry in the United States can be described as an increasing cost industry, where the average long-run costs increase with the expansion of the industry. Looking at the gross farm income, production expenses, and net farm income, it can be seen that the expansion of the industry with new entrants is correlated with the rise in production expenses. Accordingly, new entries to the market mean that the supply curve is shifted, resulting in lowering the market price. However, the increase in the production costs and the commodity prices might have led to that the prices are determined by the market, rather than market participants.