Monday, August 29, 2011

Farmers Markets and Free Entry

In some of my economics courses I talk about the competitive firm (and market) as an example of firm decision making. One of the characteristics of a competitive firm is free entry, which is when a firm can costlessly enter a new market. This is a rather strong assumption since it is so rare - if it occurs at all, but it does make the argument easier, and relaxing this assumption allows us to talk about other economic issues later in those courses.

Here is an example of a free entry (almost). The New York Times has a great article on the increase in the number of farmers markets here in the United States. Over 1000 new farmer's markets have been created this year alone. The competitive firm model shows that firms will enter a market if the price is greater than or equal to average variable cost in the short-run, and the competitive firm model also shows that firms will stay in the market if price is greater than average total cost in the long-run. This seems to be the issue at hand in the article. Farmers are entering new markets, but some are unable to remain in the new market.

Additionally the competitive firm model shows that as firms enter the market, the firms prices start to fall and the firms profits also decrease; which is exactly what is happening in many of these farmer's markets.

Not all farmer's are suffering lower profits. Some geographic markets have limited farmer's markets, and thus the entry issue is not a problem.

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