Assuming this is a perfectly competitive market, explain how the supply curve of

Question

Assuming this is a perfectly competitive market, explain how the supply curve of the steel market is derived. In your explanation, you need to explain the relationship between marginal cost and opportunity cost, and how it determines the supply decisions made by the producer.

Answer:

Supply curve has a direct relation between price and quantity, if price increase, the producers would like to increase quantity supply of the goods or services. Each price corresponded a quantity supply, when the supply is equal to the demand of the market, there is an equilibrium price. Under the perfect competitive market structure, suppliers are price taker, so they can only accepted price which result by autonomous adjusted according to invisible hand theory of the free market environment.

Cost play an important role of production which can influence the supply. Opportunity cost refers to the action that value of the next best alternative. In other words, to be benefit the one must forego to take an alternative action. For example, today I have 2 hours’ spare time, I can choose to watch a movie alone or hang out with my friends, whatever I chose I need to give up the utility bring by another action. Therefore, opportunity cost focus on what has been sacrificed instead of what can gain from the action. For producers, economic resources are limited which means they cannot produce all the goods and services we would desire. When producers decided what to produce to maximum their profit, opportunity cost will let them consider the best alternatives which has lower opportunity cost.

Marginal cost is the change in total cost when comes from producing one additional unit of goods or service. It related to individual firm production, the marginal cost curve above its intersection with the average variable cost curve represent the supply curve under the perfect competitive market structure, because firms will not operate at price below the shutdown point. In addition, perfect competitive firms decide the quantity to be produced based on marginal costs and sale price, they will produce at the level of unit which marginal cost is equal to the sale price, because if the marginal cost is higher than the price, it is not profitable for producers, on the other hand, if the marginal cost is below the sale price, firms can produce more to earn profit.

For decision making of firms, opportunity cost decided what to produce with a reasonable management of economic resources, marginal cost decided how much to produce. The low- hanging fruit principle is an expand theory of opportunity cost which states that in the process of increasing the production of goods or services the opportunity cost will increase as well and make the situation more suitable to produce other goods or services. According to this expand theory, marginal cost will be increase as one more unit goods has been produced. Then, there is a level of unit which marginal cost is higher than sale price which better for another goods or service to be produced, because firms will only produce at the level which marginal cost equal to the sale price to make profit in perfect competition market.

Am I answerd correct,Can I make any improvement.

Explanation / Answer

Your answer is absolutely correct and there is no need of any improvement. Explanation of opportunity cost , marginal cost and how the supply curve in steel market is derived is correct.

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