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What is the microeconomics - Term Paper Example

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Economics is a wide field which is divided into two different aspects of study that is macroeconomics and microeconomics.Microeconomics focuses on a smaller area and mostly on the individual and business decisions as opposed to macroeconomics which focuses on economic behavior in its totality …
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What is the microeconomics
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Download file to see previous pages Economics is a wide field which is divided into two different aspects of study that is macroeconomics and microeconomics.Microeconomics focuses on a smaller area and mostly on the individual and business decisions as opposed to macroeconomics which focuses on economic behavior in its totality However, the two are interdependent in that they both examine impacts of business activities in terms of demand and supply. Microeconomics can be defined as a branch of economics which studies the behavior of individuals and the firms in making business decisions regarding resource allocation and price of goods and services. Microeconomics makes a focus on the concept of supply and demand as well as other forces that account for the levels of prices experienced in the economy. It focuses on both higher up country decisions and government decisions as suggested by Pottsvv (87). Under the supply and demand concept, it is concerned with how buyers and sellers interact and what influences their choices. For instance microeconomics would focus on a particular company’s maximization of production capacity in lowering prices for a better competition in the industry. Microeconomics makes different assumptions on the economy. One of the assumptions is about individuals making decision on the basis of the utility concept. This implies that the individual decision should increase his/her satisfaction and happiness, thus accounting for the rational behavior also referred to as rational decision making. From this assumption, it can be argued that individuals have to make choices of their own despite their effects on the economy, has to be fulfilling to them. The concept of utility referred to here means individual benefit. Thus the individual decision as focused on in microeconomics is reflected in that the more beneficial a product is to the consumer, the more likely he/she will make a decision to use the product. According to Wessels (123), consumers in most cases assign different utility levels to different goods hence giving rise to different levels of demand. Therefore under this assumption, microeconomics focuses at both marginal utility and total utility. Marginal utility in this case indicates satisfaction brought by an additional unit of a product. On the other hand, total utility refers to the total satisfaction that is brought to the consumer by the consumption of a product The second assumption is that businesses make their decisions on the basis of market competition. Competition is a dominant factor in the market and thus it has to be focused on in making major business decisions such as pricing of products and location of the business (Bernanke 18). Microeconomics tries to analyze the levels of competition faced by a firm or company in the market and how it determines price. In microeconomics, four types of competition are studied. One of them is perfect competition whereby the supply and demand theory assumes that markets are faced by perfect competition according to Besanko and Braeutigam (382). This means that the market is flooded by many buyers and sellers hence none of them can significantly influence how goods and services are sold. In perfect competition, the assumption is that there are few barriers that hinder entry into the goods production. There is also monopolistic competition which implies that there are a large number of firms which participate in goods production with each firm being able to differentiate its products. As a result of this, there are few barriers that hinder market entry. Oligopoly competition is also focused on this assumption. It assumes that there are a relatively small number of firms participating in goods production with each firm having the ability to differentiate its products (Pottsvv 36). Under this type of competition as discussed in microeconomics, barriers to the market entry are viewed to be relatively high. Monopoly competition ...Download file to see next pagesRead More
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