Introduction to Microeconomics - Essay Example

?Introduction to Microeconomics Microeconomics can be defined as a study of market behavior at micro level such as the behavior of households and firms. It focuses on the interactions between individual buyers and sellers and the factors that influence their buying and selling decisions. (investopedia.com) In its broadest sense study of microeconomics deals with the efficient allocation of limited recourses that are available to fulfill unlimited wants of the society .This concepts is known as the basic economic problem which occurs due to scarcity. Due to scarcity individuals have to make a choice. This applies the principle of “opportunity cost” which is the cost of next best alternative forgone. Goods and services are produced by bringing together the four factors of production namely, land, labor, capital and enterprise. Microeconomics suggests that these factors of production should be allocated in the most efficient manner.(Mcconell and Brue, p 10) This brings in the principles of allocative and productive efficiency. “ Pareto defined allocative efficiency as a situation where no one could be made better off without making someone else at least as worth off” .(economic efficiency,tutor2u.net) see appendix figure 1.Productive efficiency on the other hand means that production takes place in the least costly method. Production Possibility curve demonstrates principles of opportunity cost and full-employment which means that it shows all points of production at which a country can operate by employing all of its resources. see appendix figure 2. Since microeconomics deals with consumer behavior and firms behavior most part of microeconomics explains that consumer’s aim is to maximize utility that is satisfaction and producer’s aim is to maximize profit. Economists suggest that utility defines price of a commodity. This is why diamonds are priced very high because the utility derived from their purchase is too high.(Britannica Encyclopedia,2010) Microeconmics explains price determination in goods and services markets and analyses the behavior of firms and consumers. It suggests that demand of a commodity is inversely related with price. The lower the price the greater the demand will be for the commodity. On the other hand supply in positively related to price because at a higher price producers can earn more profit by supplying more output.(Ian Hobday, p 100,105) In a market price is determined at the level at which demand equate supply as illustrated in figure 3. This discipline also offers explanation of factors that determine demand and supply. The factors that determine and influence demand are many. Demand is determined by changes in incomes of consumers, changes in tastes and fashion, changes in income tax, changes in population, changes in price of related goods, advertising and others. All of these factors bring shifts in demand curve and change equilibrium price and output. “British Gas reported 98 percent increase its six months operating profits of 2010 as compared to the same period during previous year “The profits reached to ?585m due to unusual cold winter which boosted the demand of gas prices by 8 percent.”( Aubin Lawrence, 2010) Price of related goods affects demand has been witnessed, “With oil constantly trading above $100, consumers -- particularly those looking to buy cars -- are vying for alternatives that aren't too heavy on their wallets”(Debarati Bose,2011) Supply is determined by changes in costs of production, technical progress, changes in weather/disasters and others. All of these cause supply curve to shift and change equilibrium price and quantity.(Dan Moynihan and Brian Titley , p158-165) see figure 4 .On many occasions shortages are observed due to climatic changes and so forth. “European wheat stocks are expected to hit a 30-year low as dry weather could cut yields of some major European producers up to 20 percent”( Cat Contiguglia, 2011).See figure 4. Microeconomics analysis tells firms whether of raise prices or to decrease them. This is determined by calculating elasticity of demand and supply. British gas increased prices due to which it earnt high profits. This is because demand at that time was price inelastic.( Debarati Bose,2011) Frims behavior can further be studied with the models the study of microeconomics have made. This models are essential to study market structures of real world such as perfect competition, monopoly, oligopoly and monopolistic competition. Behavior related to prices ,outputs, costs and profits are well explained in the discipline. The study lists different characteristics of different market structure due to which one can identify which firm operates in which market. For instance wheat and sugar producing firms operate in a perfect competition because they produce homogeneous products and the number of firms is too large. Hence with the help of microeconomics societies can predict behavior of firms and consumers and respond to possible changes in the markets. Causes and correlations can be identified with the help of theories that the disciple offers. Current world recession can be analyzed and today’s market can be understood. Opinion: This essay is a result of extensive research. Every concept was studies from the best possible source including books and electronic sources. Though during the research several other microeconomics concepts such cost and revenues, marginal utility and quantity theory, cost benefit analysis, market failure and several other were studied but only a few important concepts that were necessary to asses behavior of firms and consumers have been included in the essay. In order to include in the essay, the most comprehensive definition of concepts , text books written for High school and Cambridge ordinary Level Economics were consulted since these were authorized and reliable. After an in depth study of the topic, concepts were applied to real world situations to include in the essay, supportive examples. News articles were the main focus for examples. Furthermore authorized academic websites were consulted for various concept analysis and diagrams for concept illustrations. While studying microeconomics concepts the assumptions made by economists were given special attention. These assumptions include simplifying assumptions for instance a production possibility frontier assumes that a country produces only two goods and critical assumptions that affect a model’s conclusion, if an assumption is wrong the conclusion will be wrong. For instance we assume that firms seek for highest profit. Everyday price changes, shortages in markets, demand and supply fluctuations can be understood by studying economics. Furthermore microeconomics analysis is very essential for firms to decide upon price and quantity in order to maximize profit. Hence microeconomics is a vital discipline. References 1. Microeconomics, [ Internet], investopedia, available from [Accessed 2 May, 2011] 2. Economic efficiency, [Internet], tutor2u ,available from [Accessed 1 May, 3. Campbell R. McConnel and Stanely R. Brue(2008) Economics: Principles, Problems and Policies, 17/e. McGraw-Hill Higher Education. 4. Marginal Utility, Britannica Encyclopedia(2010), [Internet], available from [Accessed 1 June, 2011) 5. Ian Hobday(1988) Economics A First Course 1/e. Hobber and Stoughton Limited 6. Aubin Lawrence(2010), British Gas increased profit raises, price cut warnings.[Internet Blog]. Available from < http://www.irishtribune.com/teneur/10338-british-gas-increased-profits-raises-price-cut-warnings> [Accessed 1 June ,2011] 7. Debarati Bose(2011), How much does oil scarcity alter consumer’s choice of a vehicle?[Internet Blog]. Available from [Accessed 2 May, 2011] 8. Dan Moynihan and Brian Titley, Economics A Aomplete Course 3/e. Oxford University Press. 9. Cat Contiguglia(2011), Dry weather spurs wheat shortage,The Prague Post, 1 June, 2011, [Internet] . Available from < http://www.praguepost.com/business/8910-dry-weather-spurs-wheat-shortage.html> [ Accessed 2 June 2011] Apendix Figure 1 Figure 2 Figure 3 Figure 4 Read More