Perfectly Competitive Market, Linear Supply and Demand Curves

Supply and Demand Curves

In perfectly competitive industries a market's supply and demand functions can generally be represented linearly by the following equations,

      Market Demand: Qd(p)  = A – Bp

      Market Supply:     Qs(p)  = C + Dp

the functions above show the relationship between the price of a good and the quantity demanded by consumers and the quantity supplied by producers.  

The application and analysis of a market's supply and demand curves reveal many important attributes of the market. In solving the system of equations for market supply and demand the market equilibrium price and quantity can be determined as well as the welfare of society.  Using these curves as a base and model for perfectly competitive industries, the effects of shifts in demand and supply, the implementation of economic regulations, and changing market conditions can be modeled. 

Benefits and Shortcomings

Perfectly competitive markets are often characterized by their maximization of societies welfare. Resources for production are allocated as efficiently as possible with revenue generating normal profits (net zero), and perfect information lends a market that is both fair and beneficial to consumers and producers.

Unfortunately perfect information and the lack of any economic surplus (profit) means no incentives or capital exists for firms to undertake research and development to spur technological advancement.

References

Perloff, Jeffrey. Microeconomics. Boston, MA: Pearson Education, 2011. Print.