Bringing Perfect Competition to Life

Agriculture serves as a perennial example of a perfectly competitive market. This type of market trades in a homogenous product, which means one producer’s output cannot be easily distinguished from another’s. Additionally, a perfectly competitive market has low barriers to entry/exit; beginning or ending production must be cheap and quick. Also, a large set of buyers and sellers participate in these markets, so individual players cannot move the market. Ideal agriculture meets all these criteria: one sack of potatoes is essentially the same as any other, planting decisions are often flexible, and crop markets are mostly well populated. Last semester in Econ 170, we often pondered a farmer’s choice between planting “Crop A” and “Crop B” to study how these producers make output decisions. Low barriers to exit/entry are a key factor in the efficiency of these types of markets; producers can easily move to the most lucrative market, generally where supply least satisfies demand. That means output focuses where it is most needed.

Academic exercises with imaginary crops and unnamed farmers can easily seem detached from reality. Obviously, most professors and textbooks focus more on economics than the ins and outs farming. A few weeks ago I heard an interview with Keith Alverson—a farmer in South Dakota—on APM’s Marketplace. He discusses the impact of a predicted corn surplus (and therefore lowered prices) on his planting decisions. Last year, he and his neighbors planted predominantly corn. However, because corn prices recently slipped 14 percent, this year they plan to plant roughly half corn and half soybeans because the two crops are close to equally lucrative.

My first reaction to the interview was, “This is exactly what we imagined in class! All those diagrams and equations on the blackboard are for real!” I probably got a little too excited, but I think it really does drive home the real-world significance of economics. By actively planting in response to market prices (or projected price changes) they meet shifting demand and compensate for drought or bumper crops. However, unlike imaginary farmers on the blackboard, something beyond pure economic optimization motivates Keith. At the end of the interview he reveals “a soft spot in his heart for corn.”

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