Microeconomics' Traits - Essay Example

Abdulla Jaber  Microeconomics Fall - Econ 202-002  Dr. Martin H. Sabo  Economics is broken down into two distinct branches. One branch deals with the basic principles of supply and demand (microeconomics) while the other deals with principles involved in the national economy (macroeconomics). In definition, microeconomics is the study on how decisions of allocating limited resources made by households, individuals or firms in the market are effected. This branch of economics shows how the decisions made affect the supply and demand and how this determines prices which in turn influence the supply and demand of the goods and services. In simpler terms, microeconomic is the study on how people deal with time, money and resources. There are two theories involved in microeconomics; the production theory and consumption theory. The consumption theory deals with demand created by consumers. Each consumer maximizes the need for maximum satisfaction. Firms create the production theory and it brings about the production theory. Each firm provides maximum produce and supply in a bid to increase the profits involved. In consumption analysis, the definition of goods or services implies products desired by businesses and consumers. Goods can be directly desired or lead to other products that are desired by the consumers. An example is a machine used for vehicle production; it is desirable in that the company desires it to help in the manufacture of cars even though it has no direct value to the consumer. In goods, there are those known as bads; these are goods required with less urgency. I brief, they are more like baggage. One consumers ‘bads’ could be another’s valuable goods therefore there is no specific category of bads. In consumption, each consumer has the will to take as much as possible but are under limitation by their ability to pay for these goods. The limitation of the funds an individual has determines the budget constraint. This helps the consumer to maximize their satisfaction without spending more than they have. In consumption, a consumer has to be cautious not to violate the budget constraint. In finding the best choice for a consumer with limited amount of funds, one does this in three steps. The first step is definition of the available choices accounting for the limited funds. The second step entails seeking the desires of the consumer and discussing them in detail. The optical choice for the consumer is then under derivation from the results of the two previous steps which entails the third and last step. In a market, the only available goods for a consumer with limited funds are X and Y sold at prices Px and Py per unit respectively. The consumer then buys x units of X goods and y units of Y goods they spend XPx of X goods and YPy on Y. The expenditure is then given in an equation which is E = XPx + YPy. The expenditure cannot exceed the income of the consumer which is known as the budget constraint represented as XPx + Ypy < I. In the second step when determining what a consumer needs, there has to be completeness. The consumer cannot answer with “I am not sure” or “I don’t know”. They have to be sure either they want product A or product B. In preference, there has to be transitivity. If a consumer prefers product A to B as well as B to C, they have to prefer A to C as well. Preferences are consistent; therefore, in comparing A to C, the similarity has to be consistent to that of the A to B and B to C. The third rule of preference states that more is better. A consumer should prefer a product with more of X than that with less. Then from these facts, the best choice for the consumer is the one that satisfies his needs more than the others do without violating the budget constraint. The marginal rate of substitution is the rate at which a consumer is willing to trade product X for Y. The marginal rate of substitution varies along the indifference curve. In case the starting bundle of a potential trade is under change, the marginal rate of substitution changes along with it. The marginal rate of the marginal rate of substitution is dependent on consumer preference. Increment of good X causes an increase in satisfaction level by marginal utility of X expressed as MUx. The whole equation is expressed as MRS = Δy/Δx = - MUx/MUy. Under uncertainty, the consumption is according to the willingness of the consumer to risk an uncertain return over a certain return both with the same value. Such an uncertain return is insurance. The difference is between risk-averse consumers, risk lovers as well as risk-neutral people. This determines how their curves would look; concave, convex or even straight lined respectively. In production theory and cost, output is because of several inputs such as capital, labor and land use and other factors. With output as Q and labor as L, the relationship between the two is under representation as Q = f(L) which is the production function. Marginal productivity of labor represented in an equation as MPL = df/dL is under expectation of decreasing under high usage of a particular input (L). Under high usage of the input, the marginal productivity eventually keeps decreasing; it brings the average productivity down as well. The cost of production is therefore the cost incurred in labor input required to produce a certain number of units (Currie 67). There are three levels of cost functions; the first portrays large-scale returns for small production or small scale returns for large productions. In the other function, there is a constant return for the output and the production and in the third and final function; there is increase to scale for every production level. The marginal cost for is constant for every unit in this function but an incurrence of an additional setup cost or fixed cost makes the difference. In profit maximization, there is dependence on the market structure. A firm cannot affect the market structure but rather it has to adapt to the structure in order to participate. The returns in the short term determine whether a firm can keep its product in the market. If the firm starts to lose its grip in the market, it should change the tactical approach of adapting into the market. Find ways to interest the consumers in their products. Markets vary as the products and services they offer. In pure competition, the market has people with homogenous products. The entry and exit to and from the market is easy. There are no artificially manipulated practices such as price controls. The opposite of this is a monopoly where one dominant company has the product and there are barriers for entry into the market. In oligopoly, there are barriers to entry characterized by high entry cost; there are many sellers of a homogenous product. In monopolistic competition, there are many buyers with differentiated products hence easy entry and exit from the market (Coto-Millán 87). In non-competitive structure, the buyers are under conviction to buy the goods without much consideration for the price. In conclusion, the economy is made of small firms and companies that aid in building a stronger national economy. No matter how small a firm is, it has a certain relevance to the market and the trading activities of all these firms’ together help in strengthening the market. This microeconomics is what translates to macroeconomics and they strengthen a country’s gross domestic product. Most of the outstanding economies in the world are under constant motivation from this small firms and individuals. Microeconomics is the field that analyzes the different failures in the market and come up with solutions to remedy them (Eldridge 34). This keeps the national economy on track and prevents economic snarl-up. Works Cited Eldridge, Damien S. Essays in Microeconomic Theory. , 2007. Print. Currie, David A. Microeconomic Analysis. , 1981. Print. Coto-Millán, Pablo. Essays on Microeconomics and Industrial Organisation. Heidelberg: Physica-Verl, 2004. Print. Read More