There are many types of market structure which are perfect competition, pure monopoly, monopolistic competition and oligopoly. The market structure of Agriculture is perfect competition and sometimes referred to as pure competition. Agriculture firm is a perfect competition because it market structure characterized by a large number of firms so each of the firm in perfect competition produces an insignificant percentage of total market output and thus that no single firm can influence or control over the ruling market price. (Geoff Riley, 2006)
Besides, the agriculture product is said to be standardized or homogenous. Its means that, agriculture product is a product where buyer cannot differentiate in terms of quality, packaging or labeling. Therefore, in agriculture market customers don’t care which specific firm they buy from because it is absolutely identical. Therefore, the firms cannot charge different prices for the same product in the market. (AmosWEB Encyclonomic)
Besides that, There are freedom of entry and exist from the market in perfect competition. This type of market is feasible in the long run and no firm will dominate the market and evict other firm. (Geoff Riley, 2006)
Furthermore, each firm’s product supplied to the markets that are prefect substitutes for the product of others firms, so the demand for each firm’s product is perfectly elastic. Therefore, the firms in the perfect competition have no power to set the price they have to sell the product at the going market price. This type of firm are said to be price takers. (AmosWEB Encyclonomic) As a price taker, individual firms in perfect competition will sell their product at the equilibrium price. This can be shown in both figure 1a and figure 1b.
Figure 1a Figure 1b
At the equilibrium price, the quantity demand and quantity supply of the market is balance. The equilibrium price can be shown in figure 1a, where the supply and demand curve intersects with each others. The equilibrium price is at P*.
At any price below P*, the market shortage of the product would exist. At this price the quantity demand is higher than quantity supply therefore it will causes excess demand in this product. Due to the product shortage, the buyer would bid among themselves for the limited supply and price would rise to eliminate the shortage. (Grey Parry and Steven Kemp, 2000). Conversely, if the price is above the P*, the market surplus of the product would exist. Therefore, it will cause excess supply in this product. Sellers will want to eliminate the surplus by lowering prices. That is because, when the price falls, the quantity of demand would rise to eliminate the shortage. (Grey Parry and Steven Kemp, 2000).
When either supply or demand changes, the equilibrium price will change. As shown in figure 2a below, the increase of food demands from D1 to D2 cause the both price (P1 to P2)and quantity sold(Q1 to Q2) to increase. At the old equilibrium price of P1, quantity demanded will now greater than the quantity supplied. Therefore, the excess demand will result the quantity supply movement along the supply curve to a higher equilibrium price where the quantity of demand and supply is once again in balance. A decrease in demand for food would have the opposite effect, the equilibrium price will decrease and the quantity also will decrease. (Grey Parry and Steven Kemp, 2000)
Q1 Q2 Quantity
A change in demand will result in number of factors which are:
Bio-fuel production increase
Furthermore, the diversion of food for making bio-fuels has lead to increased demand for bio-fuel raw material, such as wheat, soy, maize and so on. Therefore, the increasing in biofuel production causing less food available for human consumption and the price of food crops were increase dramatically. The most clearly example are the use of corn in the United States for the production of biofuels. In the about 25 to 30% of corn output in the US is used for ethanol biofuels. (CNET News, 2008 )Biofuels have forced global food prices up by 75 per cent and these prices are higher than the previously estimated, a study by the recent report of World Bank (Sumanjeet Singh, 2009)
As shown in figure 2b below, when the supply of food increase from S1 to S2, the food price will fall from P1 to P2 and the quantity demand will be movement along the demand curve to a new equilibrium price where the supply curve intersects with demand curve. Finally the new equilibrium price and quantity will P2 and Q2 .
Q1 Q2 Quantity
A change in supply will result in number of factors which are:
First and foremost, that cannot denied that the natural disaster bring a seriously influence on the food production. The worst drought happened in Russia last year damaged a largely number of wheat crop and cause the Russian government to cease grain export for the year. Seriously flooding in Australia also damages wheat crops and causes some of the crops were downgraded for use only as animal food. Consequently, the wheat crops were faced shortage in the past year and cause the price of grain food has risen sharply. (Dr. Grary Peters, 2011)
Negative climate changes
Beside that, the word agriculture suppliers were significantly decreased due to the global warming. Therefore, in the global warming period will result in additional price increase for the most important agricultural crops such as rice, wheat, maize, and soya beans. According to the International Food Policy Research Institute showed in December, it states that the global warming will increase the price of corn, wheat and rice by at least two-thirds by 2050. (Bloomberg, 2011) Beside that, according to the Integrated Regional Information Networks, IRIN, it state that within the next four decades maize prices could rise by up to 131 percent due to the global temperature and some of the African farmer might have to give up agriculture if the weather are getting hotter. (IRIN News, 2010)