Objective: The goal of this activity is for IB Economics students to deepen their understanding and application of the concept of perfect competition. Utilizing the case study of Green Valley Farms, students will explore the intricacies of market structures, focusing on the transition from short-run to long-run scenarios in a perfectly competitive market.
Case Study: Green Valley Farms, located in a fertile region, is one of many small-scale farms producing organic strawberries, a market that represents a near-perfect competition. In this market, no single farm can influence the market price of strawberries, as the product is homogenous and buyers have complete information. Farmers have identical cost structures and access to the same technology, making the competition primarily on the basis of efficiency.
In the short run, Green Valley Farms experienced an increase in demand due to a surge in consumer preference for organic produce. They, like other farms, began to maximize their profits given the prevailing market price. This short-term scenario provided them with an opportunity to earn above-normal profits.
However, as time progressed, the lure of high profits led to the entry of new farms into the market, increasing the supply of organic strawberries and eventually driving down prices. In the long run, the market settled into a new equilibrium, where farms like Green Valley Farms were only able to make normal profits.
Questions for Students
- Short-Run Market Analysis: Draw a diagram representing the short-run market and firm conditions for Green Valley Farms. Explain how the firm maximizes its profit and indicate the area of supernormal profits (if any).
- Long-Run Market Adjustment: How does the entry of new firms in the market affect Green Valley Farms in the long run? Illustrate this transition with a long-run market diagram.
- Economic Profit: Explain why Green Valley Farms and other similar firms can only earn normal profits in the long run in a perfectly competitive market.
- Efficiency and Resource Allocation: Discuss how perfect competition leads to allocative and productive efficiency in the long run. Use Green Valley Farms as an example in your explanation.