An Economic Analysis on the Short-Run Supply Curve of a Competitive Firm

Course Title: Introduction to Economics

Course ID: ECN 200

Coordinator: Dr. A.K. Monaw-War Uddin Ahmed

“An Economic Analysis on the Short-Run Supply Curve of a Competitive Firm”

Name: Shariful Alam Chowdhury

Student ID: 1120023

Perfect competition – a pure market

Perfect competition describes a market structure whose assumptions are extremely strong and highly unlikely to exist in most real-time and real-world markets. The reality is that most markets are imperfectly competitive. Nonetheless, there is some value in understanding how price, output and equilibrium is established in both the short and the long run in a market that holds true to the tough assumptions of a world of perfect competition.

Economists have become more interested in pure competition partly because of the rapid growth of e-commerce in domestic and international markets as a means of buying and selling goods and services. And also because of the popularity of auctions as a rationing device for allocating scarce resources among competing ends.

Basic assumptions required for conditions of pure competition to exist:

* Many small firms, each of whom produces an insignificant percentage of total market output and thus exercises no control over the ruling market price.

* Many individual buyers, none of whom has any control over the market price – i.e. there is no monopsony power

* Perfect freedom of entry and exit from the industry. Firms face no sunk costs - entry and exit from the market is feasible in the long run. This assumption ensures all firms make normal profits in the long run

* Homogeneous products are supplied to the markets that are perfect substitutes. This leads to each firms being passive “price takers” and facing a perfectly elastic demand curve for their product

* Perfect knowledge – consumers have readily available information about prices and products from competing suppliers and can access this at zero cost – in other words, there are few...