Question

Economists believe that some agricultural product markets, like the corn market, are considered being close to the perfectly contestable markets. Please explain the reasons? If there is a perfectly contestable market with price P and marginal cost MC, what relationship do you think they have? Why?

Answer 1

Solution

Contestable markets are the market conditions where there is no barriers to entry and no barriers to exit. In this type of market the relevant Industry technology is instantly available to the potential entrants.

The agricultural product markets are considered to be a very close to the perfectly contestable markets as they meet the following marketing conditions.

• there are large number of farmers and large number of buyers in the market.
• the agricultural products are perfectly homogeneous.
• the entry and exit for the agricultural products are free as the initial to the setup cost of agriculture is very low. The farmers require a modest capital and finds it easy to acquire land for agriculture purpose especially in United States where the government encourages to convert unused lands for agricultural purposes.

Under contestable markets, when the price equals marginal cost, the returns to scale remains constant. The condition occurs when all agricultural firms supply products in sustainable configuration. Such configuration minimizes the cost of production and uniforms the level of output at lowers costs.