Additional Application
From 1992 to 2003 the number of milk producers in Florida has fallen from 300 to 190.In those same 10 years the number of dairy farms nationwide has decreased by more than 44,000.Why? The market price in a perfectly competitive industry is not determined by the individual sellers,but rather the market supply and demand.While the Florida dairy industry might not be "perfectly" competitive due to the certain USDA policies,its behavior does approximate one.If prices are not high enough to maintain some level of normal profit,firms will leave the industry.And this is what has been happening in the dairy industry.In the months after September 11,2001 the demand for milk fell,causing the price of 100 pounds of milk to decrease from about $19 to about $14,a 25-year low.In addition to falling prices,the costs of operating dairy farms have risen.Increased property taxes and environmental compliance permits have made dairy farming less viable.The average dairy farm in Florida is small with only about 700 cows.This further prevents a single supplier from being able to influence the market price.Many farmers view this business as a family operation and one they would like to pass on to their children.But continued low milk prices and profits make the likelihood of such an inheritance unlikely.
Greg C.Bruno."Milk Industry Turns Sour," The Gainesville Sun,January 22,2004,pp.1,4.
-In the long run,what will occur in a perfectly competitive industry that is incurring losses?

Question

Quizplus · Accepted Answer

In a perfectly competitive industry that is incurring losses, some firms will leave the industry, supply will decrease, and losses will disappear. This is because in a perfectly competitive market, firms cannot influence the market price and are price takers. So, if the price is lower than the average total cost, firms will incur losses and some will leave. This decreases the supply in the market and eventually the price will rise to the point where firms can earn normal profit. Therefore, option B is the correct answer. Option A is incorrect because government subsidies are not a long-term solution and might distort the market. Option C is incorrect because in a perfectly competitive market, buyers cannot influence the price, and option D is incorrect because if more firms enter the industry, supply will increase, causing the price to fall further, making losses worse.

Additional Application from 1992 to 2003 the Number of Milk Producers in Producers