The Major Importance of Economics - Case Study Example

ECONMICS TABLE OF CONTENT PAGES An Overview of Economics 03 Microeconomics 04 Market 05 Supply and Demand 06 Demand 06 Supply 09 Conclusion 11 Bibliography 11 Reference 11 This study shows about the economics and its importance. The two branches of economics are also discussed in the study while only micro economics is elaborated. Study also shows that what different things are comes under the umbrella of microeconomics and what are the condition which helps to enhance or mitigate the graphs of demand and supply. OVERVIEW OF ECONOMICS Adam Smith (1723-1790) who is known as the father of economics, in his work “An enquiry into the causes and nature of wealth of nations” defined economics first time in 1776. He, defining economics said that: “Economics is the study of wealth”. The above mentioned book of Smith has been divided into four parts; consumption, production, exchange and distribution of wealth. He came up with an opinion that the wealth, goods and service are produced in every country in accordance with some laws. Concerning the exchange and with regard to distribution of wealth, he developed some laws for mutual exchange and with regard to distribution of wealth. There are two branches of economics. (1) Microeconomics (2) Macroeconomics Here we only concerned with the microeconomics and will analyze the topics which come under the umbrella of microeconomics. Let’s have a glance over the microeconomics to get an idea of “what is microeconomics is all about?” MICROECONOMICS Microeconomics is the branch of economics which deals with the behavior of individual entities such as market, firms and households. Analysis of market mechanism that establishes relative prices among the goods and the services is one of the primary goals of microeconomics. The two words “micro” “economics” mean a millionth part. We are here concerned with the small part of a country’s economy if we are about to learn the microeconomics. We have to assume full employment and average price level is fixed while studying microeconomics. Macroeconomics analyze the market behavior of individuals and firms to understand the decision making process of firms and consumers. The connection between the individual buyers and sellers is amply elaborated in microeconomics, it focuses on the basic theories of supply and demand and seeks the answers of certain questions like, how much to produce and how much to charge it? And what is the right time to penetrate in the market in a perfect competition? We will go into the details of supply and demand after capturing an idea about the perfect market competition. MARKET A market has an enormous number of buyers and sellers present in it who penetrate in the market with same intentions and set of minds which is to facilitate the customers and to create surplus. A market offers a variety of different systems, institutions, procedures and infrastructures whereby people trade and goods are exchanged. Mr. Samuelson defines the market in his book named “Economics” that the market looks like a jumble of different sellers and buyers. A market economy is an elaborated mechanism for coordinating people, activities and businesses through a system of prices and markets. It is a communication device for polling the knowledge and actions of billions of diverse individuals. The thing which plays a vital role in the market is ‘price’ because price is the main thing which creates relationship between a buyer and seller. We are cognizant with the fact that not two persons have the same purchasing power and it depends upon the income of the individuals. Only the price of a commodity induces a customer to buy a particular commodity from a specific buyer although the consumers have a number of alternatives available in the competitive market and a number of buyer and sellers can be found in a perfect market where they all came face to face with different bargaining. Perfect market is the situation of the market when one price rules the whole of the market. The main reason is that a perfect market has unlimited number of firms and the individual buyers therefore cannot influence the prevalent price of the market by his individual action. After getting an idea about the basic idea of economics, markets and its competition now our main emphasis is to indulge in the basic theories that pertain to microeconomics which is demand and supply. SUPPLY AND DEMAND Supply and demand, probably one of the most basic concepts of economics, is referred to as a backbone of a market economy. Let’s look at both demand and supply in detail. DEMAND Demand is a word used in economics as a term carrying un-common meaning. In common conversation, demand and desire are synonymous words and can be substituted but in economics both refer to different meanings. Says “Ramesh Kumar” in his book “Economcis Analysis” let me clear it to you with the help of an example, a clerk may have the desire to own a car, since he is short of money to purchase a car, and his desire for a car can not be the demand despite his earnest desire. Despite this, it should be remembered that simply the availability of purchasing power is not sufficient to convert desire into the demand. The possessor of the purchasing power (buyer) should be ready to part with the purchasing power. In this connection, certain conditions must be fulfilled for desire to run into ‘demand’: Availability of purchasing power (Money) Existence of willingness to spend the money. Willingness to pay (price) in terms of money. Willingness to purchase a particular commodity entirely depends on its demanded price. Higher is the price, lower will be the demand and lower the price, higher must be the demand. In this manner, higher and lower demand depends on the price of a commodity. Most of the people will not purchase anything if they are not aware with the price of the particular commodity. The price that a particular buyer wants to pay for a certain commodity is called ‘demand price’. It is essential at this stage to distinguish between the ‘demand price’ and ‘market price’. Suppose the price of a pen in the market is $5 but the intensity of want of the buyer for the pen is so high that he is prepared to pay $10. Here $5 is the market price while $10 pertains with the desired price. Adam Smith in his book named ‘An enquiry into the causes and nature of wealth of nations.’ Defined demand as: “Demand is that human desire for a commodity having the backing of resources (Money). A demand curve is always a falling curve because if a person’s demand is fulfilled then he is not suppose to buy the alternative until and unless he will be offered the same thing in a lesser amount. Let’s have a glance over the graph of demand. It can be clearly seen from the graph that with the passage of rising price, the demand gets mitigating. So we can say that “Demand curve is a falling curve that shows that there is an adverse relationship between the price and demand.” There are certain conditions where the law of demand works. The conditions are mentioned below. Income of the consumer is one of the conditions which will affect the consumption. If the income changes then the consumption behavior is also changed. Prices of substitute goods will remain the same with changes in the income for the basic things like eggs and potatoes. Taste and fashion will remain the same, because of the consumer preference. Demand is bound to increase due to preference despite increases in its price. Expectation of price fluctuation influences the demand to increase, suppose that the price of a particular soap will increase in the future then the people tend to buy the soap in present and save the stocks. If the value of money (purchasing power) of money is expected to fall, the people do not decrease the demand for the goods despite increasing tendency in the prices in present SUPPLY In common conversation, supply means to provide a thing but supply is used in economics as a term carrying different meaning. Supply refers to the volume of goods and services provided for sale at a certain price during a specific period of time. According to Mayer: “The supply can be defined as a schedule of the quantity or number of goods brought for sale during a certain period of time at a specific level of price. This time period may be one day, one week or one month. It should be noted that no change in the supply conditions must be incorporated during the time period”. A functional relationship is maintained between price and supply which, with reference to law of supply, can be stated as under: “As prices of a commodity increases its supply increases but if the price falls, the supply contracts provide other things remaining the same.” The graph of the supply always shows an upward trend because the prices of the commodities and its supply are directionally proportional to each other, which means when price increases then ultimately it will stress the supply graph to increase. Producers will supply more at a higher price because selling a higher quantity at higher price increases revenue. Let’s see the graph of supply which demonstrates the same thing which we have discussed earlier. A, B and C are the points on supply curve. Each point reflects a direct correlation between the supply and the prices like at point C, the quantity supplied will be Q3 and the price will be P3. The graph manifest supply increases with respect to the changes in the prices of the commodity. When supply and demand are equal then we can say that the economy is in equilibrium. At the point of equilibrium, the amount of goods supplied is exactly the same as the amount of goods being demanded. On the contrary disequilibrium occurs whenever the price or quantities are not equal. CONCLUSION From the study we can say that the microeconomics deals with the behavior of individuals or a small part of an economy. Microeconomics is developed and made by L.J.M Keynes. It deals with the aggregate tendency like national income, savings, production, aggregate consumption, supply and demand, investment and employment. REFERNCES Heather, K. Understanding Economics. 3rd edition. Harlow: FT/Prentice Hall. 2000. Samuelson, Paul A., Samuelson, Nordhaus & Nordhaus, William D. Economics. 18th edition. Academic Internet Publishers. 2006. Parkin, Michael. Economics. 8th edition. Pearson Addison-Wesley. 2007. Read More