Microeconomics – Key Concept, Factors and Uses
Table of Contents
What is Microeconomics?
- Microeconomics is the area of economics that examines how individuals, households, and businesses make decisions about how to divide up scarce resources in the economy.
- It aims at understanding these choices people make as well as the interactions between these groups.
- The study of macroeconomics, which takes the economy as a whole into account, contrasts with that of microeconomics.
- Microeconomics is the study of small-scale money supplies, as well as patterns of production and consumption.
- It is helpful for examining how economic policies, like tax increases, may affect prices and how microeconomic behavior.
Key Concepts of Microeconomics
- Economics is a broad field with lots of terminologies, and this is also the case with microeconomics.
- Scarcity, choice and opportunity cost
- The price mechanism
- Supply, demand and equilibrium
- Market intervention
- Theory of the Firm
- Other Factors
Scarcity, Choice and Opportunity Cost
- According to this theory, consumers try to get the most value for their money by purchasing and using the highest-quality products they can afford.
- Economics demonstrates that businesses and people typically make decisions that maximize benefits and minimize costs.
- With the aid of utility theory, economists can comprehend how consumers decide what things are worth in the marketplace and how this influences their choice of how to distribute scarce resources.
- Production is the process by which a company transforms raw materials into consumables. By producing the maximum amount of goods with the fewest resources, businesses aim to maximize profits.
- The price of goods and the level of demand for goods are largely influenced by the cost, kind, and quantity of the materials used in production.
- Businesses frequently take into account supplemental expenses like taxes, labor, and land.
- An extensive portion of the study of microeconomics is devoted to examining how markets determine prices.
- In order to comprehend how prices develop in competitive markets, price theory utilize both production theory and utility theory.
- Given that supply and demand determine prices, production and utility theory aids economists in developing theories about these two factors and resulting prices.
- In a perfectly competitive market, economic equilibrium occurs when consumer demand and producer supply perfectly align.
- This isn’t always the case though, which price theory often shows. Economists seek to create market equilibriums, as they’re generally beneficial to economies as a whole.
Supply, Demand and Equilibrium
- The law of supply and demand depends on many factors.
- Generally, it refers to the relationship between an available supply and consumer demand and how that translates to price.
- Higher-priced goods create a greater supply or availability of the product.
- Lower-priced goods sell more and, therefore, relate to a lower supply in the market.
- Equilibrium occurs when businesses offer supplies at prices consumers are willing to meet.
- Consumer needs generate demand, and the nature of demand is heavily influenced by the underlying value that consumers assign to the good or service.
- We all require necessities, such as basic food stuffs, but different people may find great value in different products.
- The following factors affect how much demand there is for a good or service –
- the cost of the good or service
- the cost of comparable goods and services, particularly alternatives and complements
- preferences and tastes
- and expectations.
- Analyzing demand most frequently involves taking into account the relationship between quantity demanded and price.
- The quantity demanded has an exponential relationship with the other determinants of demand, provided that people act rationally.
- The amount of goods and services that producers offer to the market is referred to as supply.
- The relationship between quantity supplied and price can be considered in the same way that we can map the relationship between quantity demanded and price.
- Suppliers are typically willing to produce more goods and services the higher the price they are able to secure.
- As a result, the supply curve will have an upward slope from left to right when all other factors are held constant.
- The factors that determine supply are:
- prices of other goods and services
- relative revenues and costs of making the good or service
- the objectives of producers and their future expectations
- A firm will produce where the supply curve intersects the demand curve if all other factors determining supply and demand are held constant, with the exception of price.
- This is, by definition, the point at which the volume supplied and the volume demanded are equal.
- The quantity supplied will exceed the quantity demanded if the price is set above the equilibrium price.
- As a result, the firm will have to lower its price in order to sell off its stock.
- In contrast, excess demand will arise if the price is set below the equilibrium price, and the only way to resolve this is to raise the price.
- The idea of elasticity deals with how responsively quantity supplied or demanded response to a change in price.
- The price elasticity of demand is said to be highly elastic if a small change in price results in a significant change in the quantity demanded.
- Conversely, the demand is said to be highly inelastic, if a change in price has little to no impact on the quantity demanded.
- In capitalist systems, allowing markets to function freely is regarded as desirable, but it is generally acknowledged that market forces cannot be allowed to operate for all the goods and services that society needs.
- Some products and services fall under the category of “public goods and services,” which means that only government intervention can ensure their quality.
- These include the military and law and order.
- Because of this, the government may decide to establish and maintain systems that will guarantee the production of such goods and services, as well as to set prices that are either above or below the equilibrium price.
Theory of the Firm
- The theory of the firm is a branch of microeconomics that examines the different ways in which firms within an industry may be structured, and seeks to derive lessons from these alternative structures.
- A perfectly competitive market is one in which:
- there are many firms producing homogeneous goods or services
- there are no barriers to entry to the market or exit from the market
- both producers and consumers have perfect knowledge of the market place.
- A perfectly competitive market is one in which:
- When there is only one producer in the market, a monopoly develops.
- This might be the case if the producer is a government-owned corporation or if they have a legal obligation to be the only producers.
- A monopoly has the advantage of setting its own price in the marketplace, which can result in what economists refer to as “super-normal profits”.
- Due to this, monopolies are typically under governmental oversight or non-governmental organization regulation.
- An oligopoly develops when a small number of producers control a sizable portion of a market.
- Since there aren’t many producers, those that do have a good understanding of what their rivals are doing.
- They should be able to anticipate reactions to changes in their strategies.
- An oligopoly must have at least two firms to exist, and this kind of oligopoly is known as a duopoly.
- Its characteristics include complex product differentiation, significant barriers to entry, and a high level of market price influence.
- Markets with numerous producers experience monopolistic competition, but these producers typically use product differentiation to set themselves apart from one another.
- Therefore, although their products may be very similar, their ability to differentiate means that they can act as monopolies in the short-run, irrespective of the actions of their competitors.
- One of the most important aspects of markets is labor. The study of employers and employees, as well as trends in wages, employment, and income, is known as labor economics.
- This field focuses on how these markets operate and change as well as the shifting demand for paid work.
- On a micro level, a number of economic factors, such as employee entitlements, overtime pay, adjustments to the minimum wage, and taxation, can have an impact on labor economics.
- Individuals are motivated to make specific financial or economic decisions by incentives.
- Types of incentives include tax rebates, government subsidies and cash benefits.
- Consumer choice refers to the choices consumers make when they purchases goods and services.
- The needs, perceptions, desires, location, information, and income of the consumer are among the factors that affect their decision.
- Economic experts can better predict how much of a given product people will likely consume over a specific period of time by understanding consumer choice.
- Some businesses can outperform others due to competitive advantages.
- Whatever the root of competitive advantage, the result is that a company can produce goods or services that are superior to or more affordable than those of its rivals.
- Such advantages allow companies to expand more quickly and earn better margins than their rivals, which has a variety of effects on the economy.
- Access to new technology, to less expensive resources, or better distribution networks are a few examples of competitive advantages.
- This kind of economic research aims to comprehend how economic policies affect community well-being.
- It makes an effort to comprehend two different types of welfare: individual subjective happiness and the collective welfare revealed by country comparisons.
- This aids economic researchers in comprehending how communities are impacted by policies, which can aid them in determining the efficacy of the policies.
- It also has to do with resource distribution and how that affects welfare, such as how money is distributed when it is allocated to specific regions by governments.
- This evaluates how positively people perceive both their own financial situations and the overall health of their country’s economy.
- Consumer confidence fluctuates in response to public perceptions, which are heavily influenced by the media, as well as the actual state of the economy and how it affects people’s daily lives.
- Consumer confidence is negatively impacted by economic changes like rising inflation, unemployment rates, and living expenses, while it is positively impacted by falling levels of these factors.
Use of Microeconomics
- Microeconomics is a tool used by businesses to decide how many products or services to produce and at what cost.
- The cost of labor and resources, as well as the amount of money that customers are willing and able to spend, can all affect the price.
- Microeconomics can be applied by professionals in two ways –
- This area of microeconomics aims to forecast what might occur in a specific economic setting if the environment changes.
- For instance, if there is a war in a region where wheat is grown, the price of wheat in markets is likely to increase as a result of the subsequent wheat shortage.
- As markets continue to expand, having a better understanding of the microeconomic environment can help businesses develop emergency plans to mitigate the effects of unforeseen changes.
- This phrase refers to viewpoints regarding the most sensible financial choices for both individuals and businesses.
- They are influenced by an individual’s moral and political outlook, as some people may view an economic policy negatively because of their moral and political beliefs, while others with different beliefs may view the same thing favorably.