We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Nobody downloaded yet

Microeconomics - Essay Example

Comments (0)
Summary
Microeconomics Name of of professor Date Microeconomics Answer 1: The free market economy is an economic structure in which the forces of the market interact with one another in order to determine the equilibrium market condition…
Download full paper
GRAB THE BEST PAPER
Microeconomics
Read TextPreview

Extract of sample
Microeconomics

Download file to see previous pages... The theory of “invisible hand” proposed by the father of economics, Adam Smith, refers to this theory of price. According to Smith, prices are the sacrifice made by customers in order to make a utility gain through consumption of the good or service and the gain made by producers by selling the product that they have produced. Therefore, any rational consumer would be willing to make lesser sacrifice for a comparatively larger amount of gain. On the other hand, producers or sellers would desire to be willing to earn more by selling their product than the sacrifice they have made during producing the good. The market comes to equilibrium at the point at which both the decisions regarding buying and selling the good intersect with one another. This phenomenon is termed as the invisible hand, since the market operates without intervention by any third party (Mankiw 26). Figure: Free market equilibrium (Source: Author’s creation) Three important functions are played by price mechanism in a competitive market economy. These are signaling function, rationalling function and incentive function. Signaling function Prices of goods and services in a competitive market economy demonstrate the rate of availability or scarcity of resources in the market. It indicates whether resource is allocated adequately in different sectors in the economy (Adil 71). In the long run, high price level signals producers to enter the market, while customers are signaled to leave the market and look for cheaper substitutes. Therefore, supply rise and demand falls. Figure: Signaling effect (Source: Author’s creation) Rationalling function Prices can ration scarce resources when market demand is much higher than market supply. If market demand is higher, price would rise, thereby making the good available to those customers only that have the demand for the good backed by purchasing power. It helps to bring the market to equilibrium from a position of disequilibrium by equaling demand with supply (Boyes and ?Michael 26). Incentive function Price mechanism plays an active and important role in the market economy. Price of a good is the incentive for both buyer and seller to buy or sell the product. For successful running of a competitive market, prices should be efficient enough to incentive the economic agents to involve into economic transactions. Figure: Rationing and incentive effect (Source: Author’s creation) If there is excess demand it raises price. Incentive effect allows suppliers to increase supply while rationalling effect makes buyers to reduce demand. This leads to a new equilibrium (from e to e2). Answer 2: Demand and supply are two basic forces that operate in a competitive market structure. Price plays an important role in determining the equilibrium quantity of demand and supply in this type of economy. Although economic theory simplistically states that there is negative relationship between price of a product and its demand and positive relationship between price of the product and its supply; there is a difference between expansion and increase in demand or supply for a good or service and contraction or decrease in demand or supply for a good or service (Friedman 13). Expansion or contraction in demand or supply Demand (or supply) can change either due to change in price of the good (or service) or due to change in other variables affecting price. ...Download file to see next pagesRead More
Comments (0)
Click to create a comment or rate a document
CHECK THESE SAMPLES - THEY ALSO FIT YOUR TOPIC
Microeconomics
These constructions have increased the demand for steel in the Chinese economy and China needs to export large amount of iron and iron ore from foreign countries especially from Australia. Though China has a rich reserve of minerals and metals in their own territory but they are still a net importer of iron ore.
5 Pages(1250 words)Essay
Microeconomics
One of the primary elements that new firms face is in the real of advertising. Oftentimes, established firms are able to significantly outspend firms that are wishing to enter the market. This provides the established firms with a significant advantage over newly emergent companies and works to differentiate the products to a significant degree.
3 Pages(750 words)Essay
Microeconomics
A price floor is a legal minimum on the price of a good or service. This essay discusses two outcomes, that are probable when the government entails a price floor, gives comparative research on price floor and equilibrium price and explaines how the minimum wage affects the labor market.
2 Pages(500 words)Essay
Microeconomics
Each question is worth 5 marks and the total mark for this assignment is 10. This assignment is worth 10% of the final grade. 3. The assignment must not exceed 1000 words and must be submitted typed,
2 Pages(500 words)Essay
Microeconomics
It then allocates the resources available in the society to many potential uses. It also seeks to understand how national economic policies affect these households and firms. According to Tietenberg (2006), microeconomic issues regarding the environment come in
4 Pages(1000 words)Essay
Microeconomics
This is just a simple explanation of these two economic principles because, in reality, it is a lot more complicated than that. Microeconomics is to do with the market’s
2 Pages(500 words)Essay
Microeconomics
) The banks and investors can take advantage of the covered in arbitrage by investing in foreign currency and locking the position and eliminating the foreign exchange risk by entering into a forward contract. The forward contract involves buying the home currency at a future
2 Pages(500 words)Essay
Microeconomics
In a special manner, microeconomics dwells on behaviors related to demand and supply and determining prices and output in certain markets. On a broader perspective, microeconomics addresses smaller issues, putting much
5 Pages(1250 words)Essay
Microeconomics
The third approach is the last dollar rule, whereby the firm should produce at a point where the last dollar it spends on an input
3 Pages(750 words)Essay
Microeconomics
Market failure may occur when there is a negative externality that imposes an external cost on the society. The efficient level of coal gas mining for the society is lower than the market quantity. In effect, the
6 Pages(1500 words)Essay
Let us find you another Essay on topic Microeconomics for FREE!
Contact us:
+16312120006
Contact Us Now
FREE Mobile Apps:
  • About StudentShare
  • Testimonials
  • FAQ
  • Blog
  • Free Essays
  • New Essays
  • Essays
  • The Newest Essay Topics
  • Index samples by all dates
Join us:
Contact Us