The Peculiarities of Microeconomics - Assignment Example

Outline - Microeconomics 1. Abstract page 2 This portion summarizes the whole paper in few sentences. It explains microeconomic aspects generally 2. What is microeconomics? Page 2 Microeconomics is defined in this section. General concepts about microeconomics Supply and demand theory, law of supply and law of demand has been explained in this section. 3. Sub topics – Monopoly, Elasticity and utility page 6 Some of the major topics in microeconomics; monopoly, elasticity and utility has been explained in this part. 4. Suggested areas of further research page 7 This part explains the areas in microeconomics which needed to be researched further like the changes in customer buying habits and the volume of goods produced. 5. Works Cited page 8 This section gives the full details of the references used in this paper. Microeconomics Abstract 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. The allocation of resources can affect the supply and demand of the goods in the market which determine the price of the commodities. Moreover, Microeconomics analyzes the relationship between supply and demand with the prices. In other words, microeconomics mainly deals with the behaviors of the buyers and sellers and the factors which affect both buyers and sellers. What is microeconomics? Technically, Economics as a social science is classified into two broad areas: macro economics and microeconomics. While macro economics deals with the topic on a broader aspect, microeconomics has narrowed down its concentration to some specific areas of economics like the allocation of resources by firms, consumers or households which can affect the prices of the goods due to the variations in supply and demand. Investopedia describes the importance of microeconomics for entrepreneurs: “Microeconomics looks at the smaller picture and focuses more on basic theories of supply and demand and how individual businesses decide how much of something to produce and how much to charge for it. People who have any desire to start their own business or who want to learn the rationale behind the pricing of particular products and services would be more interested in this area”( “Microeconomics”, Investopedia.com, 2009) Microeconomics then is helpful to people starting up small and medium-sized business since prices matter when computing costs and determining cost drivers in the operations of an enterprise. Price is an important factor in determining costs; thus, microeconomics role : “The general concern of microeconomics is the efficient allocation of scarce resources between alternative uses but more specifically it involves the determination of price through the optimizing behavior of economic agents, with consumers maximizing utility and firms maximizing profit” (Moffat, 2009). It is established that when a commodity becomes scarce, the market demand is increased which leads to a price increase. Conversely, if the supply increases, the price hike would not be taking place. The changes in price severely affects the organizations which produce the goods or offer services especially for products that are inelastic. This leads to a price hike that consumers immediately experience such as the fluctuating price of oil in the world market. In addition to pricing as an area in Microeconomics , it also explains the impact of supply and demand variations upon the consumers, sellers and the service providers. ‘In other words, microeconomics is the analysis of the decisions made by individuals and groups, the factors that affect those decisions and how those decisions affect others’ (Moffat, 2009) Supply and Demand – its importance in microeconomics Supply and demand is a key factor in microeconomics since there exists a delicate balance between these two concepts or activities. Primarily, the economic activities in the market always depend on the supply and demand of the goods. When the supply increases, the price may come down and more customers will participate in purchasing. On the other hand, when supply decreases this leads to an increased demand ; thus, the price of the goods may go up which will prevent some customers from buying. 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”, Investopedia.com, 2009). The demand law can be understood even by a common person. Normally, nobody will purchase expensive goods if cheaper substitutes of similar quality are available in the market. On the other hand, in the absence of substitute products, the buyer may force to buy certain goods even if it is expensive. However, the amount of goods purchased for a higher price would be less in volume or quantity compared to the amount of goods purchased when the prices are low. For example, the Indian car manufacturer Tata group has recently launched a car called “Nano” for a price as low as $2000. Many consumers who were using motor bikes for their traveling needs earlier switched to Nano because of the cheaper price. Before, it was difficult for them to bear a car which was priced more than $ 10000 earlier. The law of demand can be summarized as shown in the curve given below. “A, B and C are points on the demand curve. Each point on the curve reflects a direct correlation between quantity demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on. The demand relationship curve illustrates the negative relationship between price and quantity demanded. The higher the price of a good the lower the quantity demanded (A), and the lower the price, the more the good will be in demand (C)” ( “Economics Basics: Demand and Supply”, Investopedia, 2009) The Law of Supply The law of supply exhibits an opposite illustration since “ the supply relationship shows an upward slope”; thus, when the price goes up, the supply also rises which makes producers “supply more at a higher price because selling a higher quantity at a higher price increases revenue” ( Economics Basics: Demand and Supply, Investopedia, 2009). When the prices goes high, the sellers try to increase the supply in order to gain more profits, whereas when the prices go down , the supply will follow. For example, the organization of petroleum exporting countries (OPEC) has recently reduced their petroleum production because of the less demand and price of petroleum products in the market. The fewer prices will force the manufacturers to keep their product in the store if possible in order to utilize them when the price goes high. They know very well that the scarcity of a commodity in the market will increase the price of it. The effect of supply variations can be illustrated as shown in the figure given below. “A, B and C are points on the supply curve. Each point on the curve reflects a direct correlation between quantity supplied (Q) and price (P). At point B, the quantity supplied will be Q2 and the price will be P2, and so on” ( “ Economics Basics: Demand and Supply”, Investopedia, 2009) Changes in customer preferences can affect the demand of a commodity in the market. For example, the mobile phone market is filled with so many varieties of products at present. Each product entering the mobile market may have some peculiarities to attract the consumers. Iphone is one such product which entered the market with revolutionary changes as compared to similar products in the market. A customer who uses a traditional Nokia or Sony mobile phone may be attracted towards an iphone as long as he can afford its price. He would replace his old phone and make a decision to purchase a new and better model. Moreover, he will give more verbal endorsements to the iphone which encourage others to purchase an iphone instead of a Nokia or Sony mobile phone. Thus, the demand for iphone may increases while that for other brands may decreases. On the other hand, iphone must supply enough number of products to the market in order to meet the consumer demands. Otherwise, the demand will increase drastically and the customer would be ready to pay more for the same product. Thus the increased demand may increase the product price. But at the same time, increasing price beyond certain limits may adversely affect the product movement in the market since some customers might think that iphone is very expensive and their financial abilities may not be enough to purchase one. “Demand in economics must be effective which means that only when a consumers' desire to buy a product is backed up by purchasing power and actually have an effect on the market. Consumers must have sufficient purchasing power to have any effect on the allocation of scarce resources” (“Theory of Demand” AS Markets & Market Systems, Tutor2u.net) When supply and demand balances each other, or when the supply is enough to meet the demand, all the economic actors such as individuals, firms or country will be satisfied. On the other hand, if any changes or variations happen to either supply or demand, some economic actors will suffer. In other words, when supply increases, the consumers will get more benefit because of the cheap prices; whereas, when the demand increases the sellers will get more benefit while the consumers will bear the burden. Sub topics – Monopoly, Elasticity and utility Monopoly Monopoly is a market condition in which only a single was able to control the whole activities in the market because of lack of competition from competitors. Such firms with their immense financial strengths and other resources will be able to prevent others from entering the market. Moreover they will use merger or acquisition like business strategies to remove or reduce the competition. Microsoft is one of the best examples for monopoly in the contemporary world. They are controlling the operating system software industry for a long period and even now no serious threats were there for their monopoly. Elasticity Elasticity is another microeconomic concept. The term Elasticity is used in Economics and Physics as well. Elasticity in economics is used to study, how a change happened to one thing can change another thing. For example, price hikes always affect the demand. Consider a particular car manufacturer increases prices of their products. Definitely the customers will look for other options. On the other hand, if all the car manufacturers increase the prices of their vehicles, at least some customers will stay away from the market because of their lack of financial resources Utility Utility is another microeconomic factor which controls the economic activities in the market. Utility of a good is depends on the satisfaction and benefit an individual derives from using a good or service. Utility of the good will encourage the user to purchase more of it and also to give mouth publicity to that particular product which can enhance the economic activities in the market as far as that good or service is concerned. Suggested areas of further research As we know, the price of a good depends on the volume of the goods produced. But the production of goods can depend on many factors like the availability of raw materials, energy or power, infrastructure facilities etc. So any changes that happens in any of the segment mentioned above can affect the price variations which need to be researched further. For example, crude oil prices can affect the prices of a commodity drastically as petroleum products are essential for the transportation of the goods from one place to another. Food price imcreases when fuel price goes up. Customer buying habits also can be changed over a period of time. It is not necessary that a product which moved well in the last decade will still flourish in the market in the current decade. For example, tape recorders and radio sets were main attraction for the public around two decades before. However, such commodities are moving very less in the market because of the advancement in science and technology causing the entry of new advanced products in the industry. Therefore, consumer buying habits does not entirely depend 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. Such consumer buying habits variations need to be researched further in order to get correct picture about the economic activities in the market. Works Cited “AS Markets & Market Systems”. Theory of Demand. Tutor2u, 20 October 2009. “Economics Basics: Demand and Supply “.Investopedia, 2009, , 20 October 2009. (accessed 5 April 2010). “Microeconomics”.Investopedia .20 October 2009. Web. (accessed 5 April 2010) Moffat, Mike. 2009. What is microeconomics? About.com. 20 October 2009. (accessed 5 April 2010). Read More