Introduction to Microeconomics - Essay Example

Introduction to Microeconomics Economics is considered to be the study of how citizens and societies allocate resources to satisfy infinite wants. No one has enough time or money to do everything, no matter how hard they try. This is where economics comes in and plays a vital role in the lives of everyday consumers. More specifically, microeconomics concerns the economic choices that face an individual rather than society as a whole. This has more to do with macroeconomics, which looks on a country’s economic data instead of individual data. Microeconomics is based around the choices that an individual makes when deciding what goods or services to purchase and how much of them. In order to produce a good or service, factors of production are required. There are four factors or inputs of production: land, labor, capital, and entrepreneurship. Land consists of all natural resources. This includes resources such as minerals, oil, or water. None of these things are man made and that is why they are classified under land. Labor comprises all the physical and mental processes that humans put into a good or service. To reward someone’s hard labor, wages are paid in compensation. Capital is all the machinery and equipment that is used to produce a good or service. These are all man made products and have not been provided by nature. Lastly, entrepreneurship is the intellect that is used to manage and use resources in order to make a profit. There are many topics that come under the subject of microeconomics, but this paper will just focus on three key subjects that are talked about in microeconomics the most: opportunity cost, demand and supply, and price elasticity. Because there is not enough time or money to fulfill all the needs of wants of an individual, there needs to be a choice made between several items. This is otherwise known as opportunity cost. The actually opportunity cost of a product is the cost involved in not selecting another product. If you had $100 to spend and you could only spend it on one thing, you would have a choice to make. If the two goods that are being considered are a new shirt or a new pair of shoes, then the opportunity cost would be the item that is not purchased. If the decision was made to buy the shoes, then the opportunity cost of buying that pair of shoes would be the shirt. This also works the other way as well. Many people think that opportunity cost is only defined in terms of actual money spent. This is not always the case, however. If you had a choice to make between going to watch a new movie and buying a new watch, then the opportunity cost of buying the watch would be the money spent on the ticket to the movie as well as the time that would have been required to watch it. Many people are unaware that the concept of opportunity cost happens regularly in their everyday lives. If a person had a decision to make between watching a comedy show and watching a drama, then the opportunity cost would be the show that they did not choose to watch. It is impossible to watch both shows at the same time, so a decision is required to determine between the two. This decision may be influenced by a number of factors such as personality type, general mood, and personal preference. It does not matter which show is preferred; the opportunity cost of watching that particular show is not being able to watch the other one. Another important concept in microeconomics is demand and supply. The demand for a good or service is the association between the price of that good and the quantity demanded of that good in a particular time period, all other things being equal. Quite naturally, there is an inverse curve on a graph that shows quantity demanded. That is, when the price of a good decreases, the quantity demanded for that good increases. This works the other way as well. Something that many people fail to realize is that this only applies to the quantity demanded, not the actual demand. For example, if the price of a good rises from $6 to $8, then the quantity demanded of this good would increase from 30 units to 40 units. A change in demand for a good or service only changes when the association between price and quantity demanded changes. On a graph, this is represented by the demand curve shifting to either the left or the right, depending on whether demand is increasing or decreasing. The opposite of demand is supply. Supply is the association between the price of a good and the quantity supplied of that good over a certain period of time, all other things remaining the same. Conversely to demand, if the price of a good rises, then the quantity supply of that good will also increase to take advantage of the higher price. Just like demand, an increase in price only changes the quantity supplied, not the actual supply. Because the demand and supply curves travel in the opposite direction, there has to be a point where they meet. This is otherwise known as the equilibrium point. At this point, consumers are buying enough of a good as they need and suppliers are selling enough of the same good. All parties are happy with this arrangement because no one misses out. The last major concept of microeconomics is elasticity, which measures how the quantity demanded or quantity supplied changes in response to another variable. For demand, the price elasticity of demand is calculated as the percentage change in quantity demanded over the percentage in price. Demand can either be elastic, unit elastic, or inelastic. Elastic demand occurs when the price elasticity of demand is greater than 1. Price elasticity of demand is unit elastic when the figure is exactly 1. On the other hand, demand is considered to be inelastic when the price elasticity of demand is less than 1. On a graph, a curve is elastic if it is closer to the horizontal. Conversely, a curve can be inelastic if it is closer to being vertical. A unit elastic curve happens when the curve is at a perfect 45 degree angle. In this situation, a decrease in price results in exactly the same percentage change in terms of demand. There are some factors that affect the price elasticity of demand. These factors are substitutes and percentage of a consumer’s income. When substitute goods are available, consumers will naturally respond to a price increase of a good by purchasing more of a substitute. Because of this, goods or services that have many available substitutes will have a higher price elasticity of demand then those that have very few substitutes. Another factor that affects the price elasticity of demand is the percentage of a consumer’s income. If a good takes up only a small percentage of a consumer’s income, then that customer would not change their spending habits in response to a price increase. If, on the other hand, a good consumes a large portion of a consumer’s budget, then a price increase will make them consider whether to consider purchasing that product. Microeconomics is something that we use in our everyday lives but rarely ever consider. Our spending choices have an affect on what we can afford to purchase and what we cannot. Unlike macroeconomics, which studies the greater economy as a whole, microeconomics focuses specifically on the spending habits and choices of individual consumers. The three main topics that economists look at under microeconomics are opportunity cost, demand and supply, and price elasticity. Read More