What is the microeconomics - Term Paper Example

? Number: Microeconomics Introduction 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 (Bernanke 15). 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 is also discussed under the above assumption in microeconomics. It implies that there is only one firm that is in control of the market. This makes barriers to market entry to be very high since it is this particular firm that controls the entire market shares. Therefore under this assumption, microeconomics explains how the firm price setting is influenced by the industry competition. On the same argument, the profit of a firm is dependent on how it balances its costs to revenues. Since microeconomics is based on individual firm decisions, a more competitive market limits individual firm decisions in the setting of prices. The role of competition in the market is closely related to market failure which exists in an unstable economy. The third assumption in microeconomics argues that both individuals and consumers consider opportunity cost of their activities before making their market decisions (Pottsvv 46). The issue of opportunity cost implies that individuals and businesses decide to buy or produce something at the expense of another. For instance the opportunity cost of saving ones salary instead of using it for a vacation in the beach. Though it may appear hard to quantify opportunity cost, its impact is universal and real to the individual. Opportunity cost can be used in measuring the cost of goods and services. The profit that has been forgone due to another best alternative is referred to as the opportunity cost of the initial choice or decision. Thus opportunity cost as discussed in microeconomics is the benefit accrued from a single and the best alternative. Principles of Microeconomics Price system/mechanism describes the way in which the many decisions made by consumers and the business combine in determining the allocation of scarce resources among the competing applications. This is the microeconomics essence as suggested by Bernanke (134). The price system underscores three vital functions in microeconomics. One is the signaling system which implies that prices in the market will adjust so as to demonstrate where there is the need for resources and where there is no need of the same. The second function is the transmission of preferences which is dependent on the signaling function. Through signaling function consumers can send significant information to producers by expressing their preference. This information is mostly about the changing nature of consumer wants and needs. The third function is rationing function which means that prices act as the rationing device for the scarce resources when demand exceeds supply in the market (Pottsvv 52). The market structure is another principle of microeconomics which focuses on the market characteristics which affect the nature of market competition and pricing system. According to Baumol and Blinder (267), the market structure involves all features affecting the firm’s behavior and performance in the market. Thus the market structure is characterized of market competition. Public policy is an important principle in microeconomics. This is because microeconomic tools are used in analysis of issues related to public policies. This policy issues include: electricity crisis, global warming, health issues and tax policies among others. These issues are scrutinized through the use of the relevant microeconomic tools. Income distribution as a principle of microeconomics which gives relevance to tax structure studied in microeconomics. This is because income distribution is a major determinant of economic growth in a country. Conclusion Both individual and firm microeconomics decisions are motivated by the considerations of benefits and costs. These costs can be either inform of financial costs or opportunity costs which determine the foregone alternatives. Microeconomics has been referred to as the bottom-up view of the economy. One of the major goals of microeconomics as it can be seen in the above discussion is the analysis of the market mechanism such as market competition and market failures. The principles of microeconomics also contribute in the analysis of the market structure. The assumptions of microeconomics also hold much in explaining the market structure. Works Cited Baumol, William. & Blinder, Alan. Microeconomics: Principles and Policy. Auckland: Cengage Learning. 2008. Bernanke, Ben. Principles of microeconomics. New York, NY:The MacGraw-Hill company. 2003. Besanko, David, & Braeutigam, Ronald. Microeconomics. London: New Jersey: John Wiley and Sons. 2010. Pottsvv, Jason. The new evolutionary microeconomics: complexity, competence, and adaptive behaviour. Cheltenham: Edward Elgar Publishing. 2000. Wessels, Walter. Microeconomics the Easy Way. New York, NY: Barron's Educational Series. 1997. Read More