Identifying and Analyzing Microeconomic Concepts and their Impact on the Economy - Example

Student’s Name Professor’s Name Course Date Identifying and Analyzing Microeconomic Concepts and their Impact on the Economy Introduction Microeconomics is a branch of economics that deals with the behavior of firms and individuals when it comes to matters that concern with decision making, interaction, and allocation of the scarce resources that take place among the firms and individuals. The major aim of microeconomics is to analyze the mechanisms that are used in the market in the establishment of the relative prices that goods and services should command in the market. On top of that, it also looks into the allocation of scarce resources in the market and also determining its alternative use. Microeconomics enables individual firms and individuals to establish on how they can attain free market that can enable them achieve desirable allocations. Also, microeconomics is the one responsible of ensuring that markets do produce efficient results by analyzing market failures (Nicholson, 12). Compared to macroeconomics that deals with the general factors of the economy, microeconomics deals with individual firms. Macroeconomics deals with factors like unemployment, general growth of the economy, and inflation. On the other hand, microeconomics deals with factors that have particular policies that will have an impact on the economy like taxation levels, prices, and supply and demand of goods and services. In this discussion we are going to look into various concepts of the microeconomics (Nicholson, 15). Basic Microeconomics concepts There are some of the concepts that one must understand in order to know effectively what microeconomics deals with. Some of this concepts are discussed below. Demand, supply, and equilibrium Demand and supply concept is one of the basic concepts that must be understood when dealing with microeconomics. The concepts determine the quantity of goods and services that should be in a given market at any particular time. From the concept the pricing of a given commodity can be undertaken at a particular moment. Demand is the quantity of goods and services that consumers are willing and able to at any particular time. Supply is the quantity of goods and services that suppliers are willing and able to avail in the market at any particular time. In a perfect competitive market, demand and supply are the major determinants of the price that will prevail in the market. The condition however will apply in case there are no externalities. Where demand and supply are not equal forces will apply till the equilibrium point is reached. Forces will be applied on both sides of demand and supply to ensure that equilibrium will be obtained (Landsburg, 5). The figure above is an indication on how demand and supply will respond till the point of equilibrium is attained as indicated by P1Q1 and P2Q2. The two points indicate different equilibrium points in the market regarding the prevailing conditions. At P1Q1 the equilibrium requires quantity Q1 and price P1 the same case for Q2 and P2. The change of demand from Q1P1 is due to the change of demand which made the demand curve to shift. However, the above scenario can only apply in cases where there are no externalities hence a perfect competition. Measurement of elasticities Elasticity is the act of taking measurement on how a given economic variable will response to given changes in another variable. Elasticity of these economic variables can be expressed as percentages and ratios of one another. From these percentages and ratios we can be able to determine the influence that one economic variable has over the other. This can be able to tell us the revel of responsiveness of one economic variable that will inform us of the right actions should be undertaken to achieve our economic stability target. Some of the elasticities that are usually considered are as follows; price elasticity of demand, income elasticity of demand, elasticity of intertemporal substitution, price elasticity of supply, and elasticity of substitution between factors of production(Ruffin, 13). Consumer demand theory Consumer demand theory is a concept that deals with the preference associated with consumption of goods and services and the consumption expenditures. The relation that exists between consumption preferences and preferences is used to determine the consumer preference to the consumer demand curve. The existing link that exists between consumption, personal preferences, and the demand curve is one of those most studied relationship in economics. This is a method of analyzing how different consumers can be treated to achieve the required equilibrium between expenditures and preferences. This can be done through the maximization of utility function when it comes to consumer budget constraints (Nicholson, 17). Theory of production The Production theory deals with the study of production or the processes involved in in the economic conversion of inputs into outputs. The production process should always use the available resources to ensure that the goods and services being produced meet the required quality in the market. The goods and services those are suitable for the targeted use like exchange in the market and gift giving in the economy. The production process will include storing, manufacturing; packaging, and shipping, economists insist that everything must be got right in the production level since it determines the trend the market will follow. Others have defined production as broadly an overall economic function which is different from consumption. From this perception, they are able to see the production activity as a general commercial activity that is different from the other forms of production. Costs of production Cost is a very important factor in any economy. In fact it will determine the level that the economy or the concerned firm will grow. The coat of production theory states that the price of a given commodity in the market or given service will be determined through the total cost of resources that were used in making it. Cost is not specific; it can contain all the factors of productions or some. The factors of production in context are land labor and capital. However, in production cost of technology can be defined as a form of fixed capita or a type of capital that is in a circulating form (Pindyck, 6). Cost contributes to a great deal the value of a given commodity before other factors being factored in. Markets The market is a very important concept in microeconomics. The markets are the ones that will determine to what extent that the other factors of microeconomics will stand. Those markets that do not have externalities will always allow the economic factors to prevail freely without having anomalies in their behavior. Some of the markets that exist in an economy are as follow; Perfect competition, Monopoly, and Oligopoly. Each of the above market will show different characteristics. Price Determination Mechanisms There are factors that determine the level of price that will be charged in the market. Some of the basic mechanisms include; demand and supply, the type of market and the prevailing economic conditions. Demand and supply are the major factors that will be used to determine the level of price that will be charged on a given commodity (Landsburg, 5). The figure below show on how demand and supply will determine the level of price that will be charged. At the point where the demand and the supply curves will meet we will have the price determined in a perfect market. However, in the oligopoly and monopolistic markets determination of price will not be influenced using the demand and supply. On top of this, the elasticity of the price of a given commodity will be also another factor that will determine the price that will exist in the market. The cost involved in the production process of a given commodity will also have an influence of the price that a given good and service will command in the market. Price determination mechanism will include so many factors. The final price that will prevail in the market will be determined by different conditions that are economical in nature in the long run. From time to time a product maybe having different products depending to the economic conditions. Efficiency of the firm, the market, and the industry Efficiency is all about the determination of the performance of a given firm, market or industry. When undertaking close study of all these three it is important to determine different factors to determine their efficiency. Some of the types of efficiency that will be used to determine the effectiveness of the above mentioned sectors are; allocative and productive efficiency, dynamic efficiency, technical efficiency, social efficiency and 'X' efficiency. When it comes to comparison in the three areas we find that firm efficiency will be determined on its performance compared to the others in that industry that it is. On the other hand, market efficiency is determined through the performance of the market towards its expectations. Finally, industrial efficiency is determined through the comparison of the performance of the industry with others in the economy (Pindyck, 4). Market Failures Market failures occur when a market does not behave in a manner that it should due to influence from given quarters. The types of anomalies that are experiences are as follows; Natural monopoly, Asymmetric information, Externalities, Moral hazard, Public Goods, and Transaction costs. The anomalies occur due to lack of regulations that will ensure that things are on the right track. However, there is a normative theory of market-failure that explains in the long run of any market failure, regulations will be put in place to ensure there is improved economic efficiency, and also the protection of social values through the correction of the market anomalies experienced (Ruffin, 8). Case Analysis Efficiency There is where informational efficiency of the thoroughbred horse racing market in Australia is used to predict the price through which the price will determined in the market. At the end, several of the stocks have the prices that are similar to those that were predicated. This show exactly how the market is able to indicate the exact behavior of how it is expected to be. Price determination During the summer season we find that the temperatures are higher making the demand of cold drinks to rise. The rise of demand will influence the supplier to supply goods and services at a higher price than before. In this case the rise of demand has led to an increased price. This is what that can be referred to as price determination. Market Failures In the case where the government increases taxes on given commodities, the producers will pass the tax to the consumers through the increase of prices. This is referred to as negative externalities. Competition Adidas and Nike are two dominant sports ware companies in the world. They will always try to compete in their pricing and quality. All these is undertaken to ensure that they have a larger share of consumers than the other. Conclusion Microeconomics is a very important branch of economics that deals with individual and firms. There are some of the basic concepts that must be understood to fully comprehend what it entails. On top of that, it is important to understand important factors like; price determination mechanisms, market completion, demand and supply, market failure and efficiency. Works Cited Landsburg, Steven. Price Theory and Applications. South-Western College Pub, 5th Edition: 2001. Nicholson, Walter. Microeconomic Theory: Basic Principles and Extensions. South-Western College Pub, 8th Edition: 2001. Pindyck, Robert S.; and Daniel L. Rubinfeld. Microeconomics. Prentice Hall, 7th Edition: 2008 Ruffin, Roy J.; and Paul R. Gregory. Principles of Microeconomics. Addison Wesley, 7th Edition: 2000. Read More