Principles of Microeconomics in the Present Time - Research Paper Example

Principles of Microeconomics in the Present Time Introduction Economics is one of the popular branches of social science which deals with the production, consumption and distribution of goods or services. It tells us how we can effectively manage these parameters for the growth of the people, family, society and the country. For convenience, economics is divided into two broad divisions; macroeconomics and microeconomics. Microeconomics is a branch of economics which deals with the micro or small aspects of economics like the allocation of resources by firms, consumers or households. Macroeconomics on the other hand deals with the broader aspects of economics like national income, consumption, and investment. Numerous terms are associated with both macro and microeconomics. Some of the major terms involved in microeconomics are marginal cost and marginal utility, opportunity cost, types of goods, law of demand and law of supply, monopoly, elasticity, utility etc. This paper briefly explains these terms in order to get a brief idea about principles of microeconomics. Microeconomics and macroeconomics “Microeconomics is the study of decisions that people and businesses make regarding the allocation of resources and prices of goods and services. This means also taking into account taxes and regulations created by governments” (What's the difference between macroeconomics and microeconomics, n. d). It also focuses on supply and demand and other market forces that determine the price in the market. The allocation of resources can affect the supply and demand of the goods in the market which determine the price of the commodities. Microeconomics studies the relationship between supply and demand with the prices. In other words, microeconomics deals with the behaviors of the buyers and sellers and the factors which affect the buyers and the sellers. Microeconomics normally concentrates on the micro aspects of economy. For example, it is the duty of the microeconomics to study the problems associated with or the economic condition of a specific company or organization. “Macroeconomics, on the other hand, is the field of economics that studies the behavior of the economy as a whole and not just on specific companies, but entire industries and economies. This looks at economy-wide phenomena, such as Gross National Product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels” (What's the difference between macroeconomics and microeconomics, n. d). Macroeconomics studies the economy on a broader basis with respect to the economy of the country or the world. For example, it is the duty of macroeconomics to study the current global economic crisis with respect to the countries in specific and worldwide in general. Opportunity cost Opportunity cost is the cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action (Opportunity Cost, 2009). For example, interest rates given by banks for savings accounts are less in most of the countries whereas interest rates for term deposits are more. For example a person investing $ 1000000 in a savings account may get around 3 to 4% interest whereas the same amount deposited for a specific period like 2 years or 3 years may yield interests even up to 8 to 9% in some countries. Thus the investor may get 5% excess if he invests in term deposits. In other words, the investor losses the opportunity to gain 5% excess and that also without any risk if he invest his money in the savings account. Thus the opportunity cost which may lost by the investor in this case is 5% of his invested money in the savings account. Marginal cost and marginal utility The term marginal cost refers to the opportunity cost associated with producing one more additional unit of a good (Marginal Benefit and Marginal Cost, 2009). Suppose a client ordered for making 100 toys and the total cost agreed would be $ 1000. Here the average price per toy is $ 10. After the production is completed if the client ordered for one toy more; then it is difficult for the manufacturer to deliver 101 toys for $ 1010. Instead the manufacturer may charge $ 1050. Here the marginal cost of the additional toy manufactured would be $ 50. ‘Marginal utility on the other hand is the measure of additional satisfaction (utility) gained by a consumer who receives one additional unit of a product or service. The concept is used to explain why consumers buy more of a product when the price falls’ (Marginal utility, 2009). Gold ornaments always attract ladies. But the current value of gold per gram forces them from purchasing more gold or wearing more gold ornaments. On the other hand suppose the gold value falls by around 25 to 50%, and then the buyer would be able to get some additional units for the amount of money he decided to spend on gold ornaments. Thus marginal utility is the increase in utility as a result of higher consumption. “The greater the supply of the item available, the smaller the marginal utility. In total utility, supply is the main price determinant” (Marginal utility, 2009) Types of goods As per economic classification, goods can be classified into three; Inferior, Normal and Luxury. An inferior good always move well when the income decreases whereas when the income of the people increases, the inferior goods selling would be adversely affected. On the other hand the above case is exactly opposite for luxury goods. When the income decreases, luxury goods consumption would be less whereas when the income increases, luxury goods consumption would be more. For example, the current economic recession has made the public with less income and subsequently less spending on luxury goods. A Normal good may or may not be affected by the income fluctuations. For example, normal food items are essential for the public and they may not cut down their expenses on normal food items even if the income becomes less. The Law of Demand “The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded” (Economics Basics: Demand and Supply, 2009). Nobody will purchase expensive goods if cheaper one of similar quality available in the market. At the same time, when no substitute products are available, the consumer may force to buy certain goods even if it is expensive. In such cases, the volume of goods purchased for a higher price would be less compared to the volume of goods purchased when the prices were low. Customer buying habits can be changed over a period of time and based on that the demand may also fluctuate. It is not necessary that a product move well always. For example, radio was a major attraction for the public earlier. At present, radios are rarely used because of the entry of other advanced items due to the technological advances. It is evident from the above example that the consumer buying habits are not purely based on the availability and price of a product. It can vary periodically based on the improved life standards and the arrival of new goods in the market. The Law of Supply “The higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at higher price increases revenue” (Economics Basics: Demand and Supply, 2009) Price hikes often results in increased supply by the product manufacturers or the service providers in order to gain more profits whereas when the prices goes less, the supply will also come down. For example, OPEC countries forced to reduce the production of oil recently because of the less demand. They know that the scarcity of a commodity like oil may increase the demand and thereby the prices also. On the other hand when the price goes up they will increase the production and the supply in order to get more profit. Thus supply depends on the market conditions. Monopoly Monopoly is a peculiar market condition in which only a single manufacturer or service provider was able to control the whole market activities because of lack of competition. Microsoft is the best example for a monopolistic firm in the current world. They are controlling software industry for a long period especially the operating system industry and nobody was able to challenge them till now. Monopolistic firms with their huge financial strengths and resource capacities would be able to block others from entering the market. They will use every tactics to silence the competitors. Merger or acquisition like strategies would be used by them to silence small challenges. Elasticity Elasticity is a general term which is used in Economics and Physics as well. While in Physics, the elasticity represents the ability of a material to regain its shape after the force applied is removed, in economics elasticity is used to study how a change happened to one material can affect another one. For example, the current financial crisis has forced many people of America to leave their vehicles and depend on the line buses for their transportation needs. Thus the less demand for cars or other personal vehicles increased the demand for public carriers. When the prices of a product or service increases due to some reasons, the customers would definitely look for other options. Utility Utility is another parameter widely used in microeconomics. Utility of a good controls the economic activities with respect to that good in the market. It depends on the satisfaction and benefit associated with a good to a particular customer. It is not necessary that the utility of a good might be the same for another consumer using the same good. For example, it is not necessary that the utility of designing software to the designer is equally useful to a programmer or an office secretary. For a computer programmer, programming languages are more useful than the designing software whereas for an office secretary, basic word processing and spreadsheet like software are more useful. Conclusions Macroeconomics deals with the economic aspects on a broader level or macro level whereas microeconomics focuses the economics of specific things. Supply, demand, monopoly, utility, elasticity, marginal cost and marginal utility, opportunity costs, type of goods etc are some of the common economic terms used in microeconomics. These terms are useful to identify the economic activities at the micro level. Works Cited 1. “Marginal utility”. 2009. 07 November 2009. 2. “Marginal Benefit and Marginal Cost”. 2009. Investopedia. 07 November 2009. 3. “Opportunity Cost”. 2009. Investopedia. 07 November 2009. 4. “What's the difference between macroeconomics and microeconomics”. 2009. Investopedia. 07 November 2009. 5. “Economics Basics: Demand and Supply”. 2009 Investopedia, 07 November 2009. Read More