The Economists Dictionary of Economics - Term Paper Example

Your full full Econ 2022, Microeconomics October 19, According to The Concise Encyclopedia of Economics, Microeconomics is the study of the economic behavior of small economic groups such as firms and families and is one of the largest subfields in economics. Microeconomics analyzes decisions at a micro level. It goes deeper than that however. It also measures the factors that affect microeconomic decisions and how those decisions affect others. Microeconomic decisions are influenced by cost and benefit circumstances. Costs can be in terms of financial costs such as average fixed costs and total variable costs or in terms of opportunity costs, which consider alternatives foregone. Macroeconomists consider questions such as "What determines how much a consumer will save? “and "How much should a firm produce, in comparison to the strategies competitors are using". The Economists Dictionary of Economics defines Microeconomics as "The study of economics at the level of individual consumers, groups of consumers, or firms... 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." Microeconomics is a field of economic study that focuses on how an individuals behavior and decisions affect the supply and demand for goods and services. For the purpose of microeconomics, the actions of individuals, households and businesses are crucial. One key element of microeconomics is price theory. Theoretically, all markets are perfectly competitive, with supply and demand driving prices. However, individuals and groups can directly affect the supply and demand of products and services. Labor economics, for example, is based largely on the analysis of the supply and demand for labor of different types. An economic theory contends that the price for any specific good/service is the relationship between the forces of supply and demand. The theory of price indicates that the point at which the benefit gained from the people that demanded the entity,  meets the sellers marginal costs is the most optimal market price for the good/service. Labor is a measure of the work done by human beings. Labor economics seeks to understand the functioning and dynamics of the market for labor. Labor markets operate through the interaction of workers and employers. Labor economics looks at the suppliers of labor services (workers), the demands of labor services (employers), and attempts to understand the resulting pattern of wages, employment, and income(Freeman, 72-76). Market failure is a situation in which a market is inefficient in organizing production or allocating goods and services. It usually has to be an extreme case, to be considered market failure. Market failures can occur when monopolies take over, when there is a lack of knowledge for the buyers or sellers, etc. Opportunity cost is also a main concern in microeconomics. In microeconomics, an individual can point out specific opportunities that become unavailable as they use their resources for other purposes. Economic growth is an increase in the capacity of an economy to manufacture goods and services from one period to another. It can be measured in nominal terms; which include inflation, or in real terms, which adjust for inflation. A measure of economic growth from one period to another in the form of a percentage is known as economic growth rate. However, this measurement does not adjust for inflation. This method is used to compare the rate of chance a nation’s gross domestic product goes through one year to another. GNP or gross national product can be used if a nation’s economy is heavily dependent on foreign earnings. The formula below is how analysts calculate the growth of a country using GDP, Gross Domestic Product. Keeping track of a countries growth can help prepare for future prospers or recessions. It helps the government see where the economy needs work or improvement. Business economics describes elasticity of supply as a measure of how much QS (Quantity Supplied) reacts to a change in prices. Elasticity of Supply is equivalent to “percent change of QS/”percent change in price”. This value can be between zero and infinity. When elasticity is less than one, supply is inelastic. If elasticity is greater than one, then supply is elastic. The main factor of supply elasticity is length of time. The shorter the time period, the more inelastic the supply, because it is more difficult to get the additional inputs to increase production. It also depends on the firm’s capacity. Elasticity of supply predicts the change in quantity supplied for a specific change in price. More specifically, income elasticity can predict the percentage change in demand for a given percentage in income. Price elasticity of demand for a particular product predicts the percentage change in quantity demand for a given percentage change in price. This is a major aspect of demand circumstances from the strategic point of view. It makes an estimate of how much revenue will change when prices are changed. An increase in revenue does not necessarily mean an increase in profits however, and costs may change as well (Fundamentals of Economics for Business, 32). The elasticity of demand has many factors. Income elasticity of demand is calculated as the percent change in quantity demanded divided by percent change in income, ceteris paribus There are two possible relationships. If demand increases when income increases, elasticity is positive and good is normal. If demand decreases when income increases, elasticity is negative and the good is inferior. Many factors influence elasticity and include: necessities versus luxuries; it is more difficult to find substitutes for necessities, therefore quantity demanded will change less; availability of close substitutes, meaning if there are substitutes close, consumers will move away from more expensive items and demand will be elastic; definition of the market, the broader we define an item, the more possible substitutes and the more elastic the demand; Time, the longer the time available, the easier to find substitutes and the more elastic the demand. The main influence on income elasticity of demand is whether a good or service is a luxury or a necessity. When they are wants, elasticity is usually highly positive, or greater than one. When goods are needs, elasticity is usually lower, or less than one. Arc elasticity of demand calculates elasticity between two points on a curve. The elasticity of a curve can vary depending on where you are. To calculate arc elasticity of demand we take the midpoint in between. (change in Q / average Q --------------------------- (change in P / average P) Cross elasticity indicates the percentage change for a given item resulting from the price percentage change of either a complement, or substitute item. This is an example of the formula for cross elasticity of demand: PEoD = (% Change in Quantity Demanded)/(% Change in Price) [[QDemand(NEW) - QDemand(OLD)] / [QDemand(OLD) + QDemand(NEW)]]*2 This formula takes an average of the old quantity demanded and the new quantity demanded on the denominator. When we use arc elasticity, it does not matter which point is the starting point, and which point is the ending point. These measurements of elasticity are important. Economists benefit from knowing how responsive or elastic the quantity demanded for a good is, in response to a change in the price of another good. For example, if the price of an Xbox decreases, we can infer that the quantity demanded for Xbox games will increase, and more games will be sold to counter the sales of the game system. By analyzing cross price elasticity, we can measure responsiveness and determine if the goods are substitutes, compliments, or not related. The formula is as follows: E = change in quantity demanded of good A change in price of good B E>0 are substitutes which are goods that can be used to replace another good; for example, Coke and Pepsi are seen as substitutes because they have a very similar taste, so price might be a determinant for the decision to choose one over the other. E "Chapter Two." Fundamentals of Economics for Business. 2nd ed. 29-32. World Scientific Publishing Co. Web. http://www.worldscibooks.com/economics/6794.html "Supply and Demand Partial Equilibrium Market Model in Matrix Form « Quantitative and Applied Economics." Quantitative and Applied Economics. Web. 24 Nov. 2011. . "Microeconomics: The Concise Encyclopedia of Economics." Library of Economics and Liberty. Web. 18 Nov. 2011. "Elasticity of Supply and Demand - Determinants of Elasticity, Total Revenue." Business Economics | Introduction to Basic Economics. Web. 18 Nov. 2011. . Freeman, R.B., 1987. "Labour economics," The New Palgrave: A Dictionary of Economics, v. 3, pp. 72–76. Volker Böhm and Hans Haller (1987). "Demand theory," The New Palgrave: A Dictionary of Economics, v. 1, pp. 785–92. Read More