- [Instructor] We're
told corn is used as food
and as an input in the
production of ethanol,
an alternative fuel.
Assume corn is produced in a
perfectly competitive market.
Draw correctly labeled side-by-side graphs
for the corn market and a
representative corn farmer.
On your graphs, show
each of the following:
the equilibrium price and
quantity in the corn market,
labeled P sub M and Q sub M,
respectfully, respectively;
the profit-maximizing quantity of corn
produced by the representative farmer
earning zero economic
profit, labeled Q sub F.
So, like always, pause this video,
and see if you can do this on your own
before we work through it together.
All right, now let's
work through it together.
So, we're going to do correctly
labeled side-by-side graphs.
So, let me do, this is going to be my
horizontal axis for the market,
and then this is going to be
the horizontal axis for the farmer.
And this is going to be quantity
in the market, quantity,
quantity, and then this is going to be
quantity for the farmer, quantity.
And then this is going to
be price in the market.
And whatever the market price is,
that's also going to be the price
that the farmer has to take,
because it says it's a
perfectly competitive market.
So, the farmer's going
to be a price taker here.
So, let me make these axes.
So, this is price right over here,
and this is price over here.
So, first, let's draw the corn market.
So, let me label this corn market.
And we've done this
multiple times already.
Our demand curve might
look something like this.
This is our demand curve,
as when price is high,
low quantity demanded;
when is price is low,
high quantity demanded.
And supply goes the other way around.
So, our supply curve would
look something like this.
And then this point,
this helps us figure out,
this is going to be our equilibrium price.
So, that's P sub M, P sub M.
And then this is going to be
our equilibrium quantity, so Q sub M.
Now, this graph over here,
we are going to draw the farmer.
So, this is going to be the farmer,
the farmer's firm right over here.
So, the farmer's going
to be a price taker.
So, whatever the equilibrium
price in the market,
that is going to be the price
that the farmer is going to have to take.
That market price is going to be
the farmer's marginal revenue.
Now, they say the
profit-maximizing quantity
of corn produced by the farmer,
by the representative farmer earning zero
economic profit, labeled Q sub F.
So, we're gonna have some
quantity right over here.
It is the profit-maximizing quantity,
but it's also zero economic profit.
So, the zero economic profit tells us
that the price must be equal
to the average total
cost at that quantity.
So, I can make an average total cost curve
that looks something like this.
And I'm going to make its minimum point
intersect that market price,
because we know, from previous videos,
that the profit-maximizing quantity
happens where the marginal cost
intersects the marginal revenue,
which, in this case, would be the price
that the farmer has to
take from the market.
And we know that the marginal cost curve
intersects the average total cost curve
at this minimum point right over here.
So, I could draw a marginal cost curve.
It might look something like this.
So, that is our marginal cost curve.
And notice, the marginal cost curve
intersects the average total
cost at that minimum point.
We explain that in
multiple videos already.
And we've explained in a previous video
that the profit-maximizing quantity
is the quantity at which the marginal cost
and the marginal revenue meet.
And the price is the marginal revenue.
Beyond that point, every incremental unit,
the corn farmer's gonna take a loss.
It's gonna take 'em more
resources to produce that corn
than they're going to be
able to get in the market.
And we also mentioned that this has to be
a situation of zero economic profit.
So, the average total cost
has to be at that price,
at that marginal revenue,
right at that point.
So, this right over here would be our
Q sub capital F.
And we're done.
