MC and ATC are increasing

What market structure most appropriately describes the bananas growing industry? In this study case, the most appropriate market structure is perfect competition. The distinct features of this market structure are: 1. Large number of buyers and sellers. 2. Sellers sell homogeneous products. 3. Firms and consumers are price takers.

According to these, many evidences in this case imply the banana- growing industry is a perfect competition market. The most obvious one is importing banana from Asian will hurt the domestic growers a lot. Also supermarket giant Coles announcement about they will not try to cover the banana shortage and the implement from the federal government shows the import competition is discouraging effect on price of domestic banana.

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When Cyclone Ways crossed the north Queensland coast in February 2011 some 90 percent of Australia’s banana crop was again destroyed, with many of the farmers previously affected by the cyclone Larry facing economic ruin (BBC News, 2011) These two points prove that both domestic and foreign sellers sell homogeneous product (foreign banana and domestic one are close substitute), also domestic banana sellers and consumers are price takers (firm cannot charge a price either higher or lower than the market price).

As a result in this case the banana-growing industry is a perfect competition market. 2. Explain and illustrate, what the likely short-run effect f the cyclone is on the cost curves of a bananas growing firm in the cyclone-affected region? In the short run, both average total cost (TACT) and marginal cost (MAC) will increase. Based on the law of diminishing marginal returns, when products expand, the return of per unit product is decreasing.

On the on the other hand both MAC and TACT are increasing. The examples in this case are The nature of the problems which can arise from this an be seen in the case of the increase in the cost of bananas associated with Cyclone Larry. Between March 2006 and September 2006 the index for fresh fruit increased from 160. 2 to 293. 4 (an increase of 83. 1 per cent) (ABS 2009). This reveals banana industry after shock from cyclone, the cost to produce additional units of banana increase rapidly.

Two rational reasons can explain sharply rising MAC and TACT: the first one is a large percentage of bananas were destroyed by the cyclone (ex: 80% damaged in the Kennedy area). Thus the industry actually suffers great losses, it raises the TACT sharply to replant bananas. The second reason is the law of diminishing marginal returns. One explanation for such price differences is that Australia does not import bananas. The Quarantine Act 1908 banned imports of biological material unless there is no risk in doing so.

Since 1995, Filipino banana growers, who are the second-largest producers of bananas in the world and account for 12% of world banana exports, have been trying to export bananas to Australia. 19 An International Risk Assessment (AIR) carried out by the Commonwealth government in 2008 found that although Filipino bananas had up to 122 species of potentially armful pests and diseases, only 21 were of an ‘unacceptable risk if no controls were put in place(Herewith, M& Gillespie, R 2011).

As the demand on banana increase, suppliers intend to sell more bananas, however, MAC and TACT increase as production REPORT FOR ECONOMIC By penetratingly cyclone maintained by professionals, such as warning of the cyclone’s arrival and working on genetically modified banana plants implies effective measures like technological progress will increase productivity, at the same time, decline MAC and TACT. 3. Explain and illustrate using the perfect competition model what the likely short- UN effect of the cyclone is on the profits and quantities produced by a banana- growing firm in the cyclone-affected region.

In order to maximize the profit, firms produce at the point where marginal cost (MAC) equal to marginal revenue (MR.). Also firms as a price taker have to produce at a price where marginal cost equals the market price (where MAC=MR.=P). In the short run, in the event of P>TACT, the firm has profited and produce at IQ (See graphs). In the event of PNamely, in the short run, along with a sharply increasing price, the price of banana may still maintain higher than TACT and banana growers can still profit. However, in the event of some measures or policy such as relax banana importing restrictions are implemented to cover the demand shortage, the price of banana will lower than TACT. In the event of in this situation, banana sellers will suffer the losses, they will continue to supply nana until the price reaches to the point where P equals PVC (shutdown point). Therefore, in the short run, government supports for banana-growing industry is very necessary. 4.

What is the long-term response in the industry to the existence of economic losses, economic profits normal profit? How will the changes demonstrated in your answers to questions 2 and 3 affect the firm’s profit position in both the short run and long run? In the long run, the supply response to an increase in demand is greater. The economic profit in the long run will be forced to zero, where demand equals supply (P=MR.=MAC=LIRA, see graph 3). Also, in long run economic losses of industry are eliminated by firm leaving the industry. Resources are reallocated from firms suffering losses to firms making profits.

In view of the fact that losses diminishing by leaving firms, other firms in the industry can obtain at least normal profits. In this study case, although in short run MAC and TACT increase after the cyclone, in the long run the long run average cost (LIRA) will decrescendos. Furthermore, in a short run in the event of banana industry is supported by government, price may above TACT. Some of the producers still make profits. In the event of banana growers are without retentions from government, growers will have losses and eventually many of them consumer tastes, the economic profits will be forced to zero.