Microeconomic Concepts in the Real World - Research Paper Example

Running Head: MICROECONOMIC CONCEPTS Topic: Microeconomic Concepts in the Real World Managerial Economics Concepts Concept of Equilibrium Equilibrium usually occurs when there happens to be a meeting point of the demand and supply curve. This leads to the occurrence of equilibrium prices, which are the costs that connect the readiness of the buyers to pay the cost of all the units produced, with the readiness of the sellers to offer their goods to the last units. This means that it connects the prices that fall within the demand curve with those that fall along the supply curve. This concept leads to the situation whereby the price becomes a representative of marginal assessment of products in the market (Robert et al 2005). When prices are at equilibrium, the market operates at a situation whereby there is no shortage or excess of products in the market. The behavior of sellers and consumers tend to force the market to shift towards the equilibrium. Market equilibrium represents a situation such as when producers offer a particular quantity in the market such as quantity Q1. In order to ensure that they produce at this level without a loss, they have to sell the product at a certain price P1. This will be the marginal price represented by the supply curve. On the other hand, the consumers have a certain price P2 that they are ready to pay for the products, and they can only afford to purchase a particular quantity of products, Q1. This means that supply in the market will be in excess, a situation that can only be rectified through a reducing the level of output (Fig. 2). In a situation whereby the producers offer their products at quantity Q2 (fig 3), they will be compelled to sell their product at price P2. Nevertheless, consumers are ready to pay for quantity Q2 at price P1. This means that a there might arise a deficit concerning the willingness and the ability of the consumers to pay a higher cost for a higher amount produced by the sellers. Such a situation leads to sellers trying to utilize any available openings in the market in order to make profits, leading to a rise in supply. This is an indicator of a free market, which is controlled by the price mechanism. The market remains at equilibrium whereby prices would reduce to match the occurrence of surplus production in the market. On the other hand, if the market operates in a situation whereby the demand is higher than the supply, the prices tend to go up, which in the long run leads to a reduction in demand for products in the market. The market equilibrium is accomplished when sellers produce the same quantity of goods and services as what customers are willing to pay for, which brings competition in the market (Smith 2003). The Concept of Market Changes The term market refers to an organization, or any situation whereby people are provided with an avenue for participating in trade. Sellers offer goods and services to be sold to willing buyers, depending on their capability to pay. It is a major component of the economy. Some markets operate under the laissez-faire whereby there is no government influence in the transactions that take place. It does not set price ceilings or bare minimum wages and other such interventions that may limit the activities in the market. Under conditions where a single seller dominates the market (monopoly), there is usually the likelihood that prices may be altered or when there exists a situation whereby there is a single large buyer who dominates the market (monopsony). Such a buyer is likely to compel the sellers to lower the prices of their products (Estrin 2008). The outcome of the market usually depends on the behavior of buyers and sellers. Changes associated with the behaviors of such participants in the market adversely affect the welfare of all the players in the market. The market functions are adversely affected by alterations in the prices of products especially if the consumers are unable to pay the prices that the sellers require in order to supply the quantity demanded by the buyers. These functions are also affected by the ability of buyers to pay for the products, as well as their bargaining power. This interferes with market efficiency and the acceptability of the final product in the market. There are certain situations whereby there occurs market failure. This is usually associated with the presence of an equilibrium price, but neither the customers nor the suppliers are satisfied with the market prices. Changes in the quantity supplied and the prices while other factors remain constant tend to lead to the occurrence of equilibrium in regard to quantity and price. Apart from the prices of commodities, factors such as technology, the cost of input, as well as the price of complementary goods may affect the behavior of consumers in regard to buying and selling, especially in terms of supply. Consumers are also part of the major factors that influence the demand of commodities in the market (Frank 2008). Economic Concepts affecting the Market for Marijuana The federal government does not recognize the sale of marijuana as a legitimate business. This means that the business is regarded as illegal, and therefore, no taxes are collected from dealers. However, states such as California recognize the business and collect substantial amounts of money in form of taxes. Regulations by the federal government regarding marijuana trade largely affected supply and demand of the commodity. There are limitations regarding the interstate trade in the commodity. This leads to a shortage since there is a high demand for the commodity. Consequently, a reduction in the supply of marijuana in the market due to the limitations leads to a rise in the prices. On the other hand, the government undergoes an opportunity cost in form of the taxes that could otherwise be collected from the marijuana trade if it became legitimate (Dyer 2009). This money could be used to finance the federal government’s budget. Conclusion The forces of demand and supply are important in determining the price of a commodity in the market. When equilibrium is reached, the producers offer the same quantity that is needed by the consumers, which is significant in ensuring that the market operates without a shortage or surplus of commodities. Any surplus production would lead to a reduction in prices, whereas a shortage is likely to cause a rise in the market prices. The behavior of buyers and sellers in the market largely affects the market prices for commodities. In a market dominated by a single seller, prices are likely to go up while in situations where a single large buyer dominates the market, there is likely to be a drop in prices. The purchasing power of buyers significantly affects the market functions. This is because they can only pay the prices that they can afford while on the other hand sellers can only offer commodities at prices which can not lead to a loss. In regard to the market for marijuana, the federal government’s regulations adversely affect the supply and demand of the commodity, which in turn leads to a rise in its prices. The government foregoes the taxes which could otherwise be collected from trading in the commodity. References Dyer J. (2009). A cure for the US: Marijuana taxes, viewed on 23rd Aug. 2009 at, < http://www.jamaicaobserver.com/magazines/Business/html> Estrin S., Laidler D., and Dietrich M. (2008). Introduction to Microeconomics, Pearson / Financial Times Press. Frank R. (2008). Microeconomics and Behavior, McGraw-Hill Higher Education. Pal S. (2009). Managerial Economics: Cases and Concepts, MacMillan Robert S. Pindyck and Daniel L. Rubinfeld, (2005) Microeconomics, Sixth Edition, Pearson Education. Smith D. (2003) Free Lunch: Easily Digestible Economics, Profile Books. Read More