Perfect competition arises when there are many sellers, each selling an identical product, and they should be of equal size. Also there are many buyers; there are no restrictions on entry and exit.

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Perfect competition arises when there are many sellers, each selling an identical product, and they should be of equal size. Also there are many buyers; there are no restrictions on entry and exit. No individual firm can influence the price at which it sells its output. Firms are said to be price takers. Price maker is the market. Coffee growing has many of the characteristics of a perfectly competitive market.

Coffee is the second largest export commodity in the world after oil and is exported from 52 countries in the south. From 1990s coffee industry has been transformed from a managed market, in which governments played an active role both nationally and internationally, to a free-market system, in which anyone can participate and in which the market itself sets the coffee price. There are large numbers of producers and their productions are almost identical.

The world production of coffee has risen dramatically in the past three years mainly due to the production increase in the two world leading countries Brazil and Vietnam, Vietnam has for example increased production by 1400 % between 1990 and 2000, and Brazil has contributed even more than Vietnam to the global oversupply during the past five years. Both countries also have large numbers of trees in development, which will lead to an overproduction for at least the next 2-4 years. The total world production of coffee is estimated to reach 117 million bags in 2002/2003, while the world consumption will only reach 108 millions bags. With an oversupply of 8 million bags. perfect competition theory can help us to explain this situation.

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In the perfectly competitive market, the producers make supernormal profits if price exceeds average cost or total revenue is greater than total cost. Knowledge that supernormal profits can be earned attracts new producers to the market or existing producers will increase the scale of their operations. The industry supply curve will shift to the right, leading to a fall in price because of the increase in supply and competition. The producers have to take the lower price and its demand and marginal revenue curves shift down. Price continues to fall until all the supernormal profits have been competed away. Freedom ...

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