Understanding Microeconomics Issues - Essay Example

Understanding Microeconomics Issues Introduction Microeconomics is one of the essential topics in the building of the foundation in the understanding of economics. There are important issues that must be understood in microeconomics and they include supply and demand, utility, and market failure and competition. All these issues are important in the understanding of the relationship between the consumer, the producer and the trend in the market. Their relationship provides the key to the understanding of economics. As goods and services are produced for sale, there are a number of factors that play a role in determining the prices at which the products will be sold, chief of which are supply and demand. Supply and Demand The backbone of any market economy and the most significant concept in economics is the supply and demand. Demand can be described as the quantity of a product or the services that are desired by the consumers. The amount of product that the people are willing to buy at a given price is the quantity demanded and its relationship with the price is referred to as demand relationship. Supply is described as the quantity of product and services that the market can offer. The amount of product that the producers are willing to supply at a certain price is the quantity supplied and its relationship with the price is referred to as supply relationship. An increase in the price of a commodity is accompanied by an inverse relationship in the quantity demanded, if all the other factors are held constant; this is according to the law of demand. The same law applies to the law of supply but the supply relationship indicates an upward slope; this translates when the price is high, the quantity supplied is high. The economy is said to be in equilibrium when the demand and supply are equal. The distribution of goods is efficient because the quantity of goods supplied is the same as the quantity of goods demanded. Disequilibrium occurs when the supply or the demand is in excess (Investopedia, n.d.). Utility Utility is referred to as the ability of a product to satisfy a want. Utility signifies that something is wanted and it is expected to satisfy the given want. The following are the features of utility; (a) it is the cause and its result is satisfaction, (b) it is different from pleasure, (c) it has no links with the usefulness of a commodity, (d) it is subjective that is it varies from one person to the other, (e) it is created through production, and (f) it is distinct from the price of a commodity. Utility is of two types according to Information Village (2009); marginal utility and total utility. Total Utility Utility that is derived from the sum total of the units of a product consumed by an individual is referred to as total utility. For example, if an individual consumes 3 units of a product, the sum total of the utility consumed is the total of utility that is derived from the first, second and third product (Information Village, 2009) Marginal Utility Marginal utility is the change in the amount of total utility and it results from the consumption change in one unit of a product per unit of time. It can also be defined as the additional utility in every additional unit of a product that is consumed per unit of time according to Friedman (nd). For example, if an individual consumes three units of a product, marginal utility refers to the addition made to the overall utility by the consumption of the third product (Information Village, 2009). There exists a relationship between marginal utility and total utility. Total utility increases at a declining rate because it is composed of the marginal utility; it does so as long as the point of satisfaction has not been reached. Point of satisfaction is the point at which the marginal utility is zero and total utility is at maximum and it is the point at which the marginal utility turns into negative and the total utility starts to fall (Information Village, 2009). Market Failure and Competition Market failure occurs when the economy becomes incapable of efficiently allocating enough resources. The result of market failure is scarcity and a general variance between supply and demand. Market failure is often linked with the role competition plays in the manufacture of goods and services. Market failure can also arise from the misjudgement or asymmetric information to the effects of a certain action; this is referred to as externalities. How a firm faces competition in a market and how competition determines the consumer prices are among the most widely studied concepts (Radcliffe, n.d.). Four Main Types of Competition Perfect Competition A big number of companies produce a particular good and there is a large of buyers in the market. The fact that there are many companies producing, differentiation between the products is negligible and each of the company is incapable of affecting the prices because the individual companies have a low market share. Barriers are few to those who want to enter in the production of these goods (Radcliffe, n.d.). Monopolistic Competition In monopolistic competition, there are a huge number of companies producing the good and the companies are capable of differentiating their products from competitors. Barriers are few to those who want to enter in the production of these goods. Oligopoly and Monopoly In oligopoly competition, the number of firms producing a good is small and each of the firm is capable of differentiating its products from those of its competitors. Barriers are very high to those who want to enter in the production of these goods. In a monopoly, there is only one firm controlling the market. The company controls the whole market share and thus the barriers to entry are very high (Radcliffe, n.d.). Conclusion Microeconomics plays a major role in the understanding of the relationship between the consumer, the producer and the trend in the market. Supply and demand are critical in the determination of the price of a commodity in the market. Utility determines consumer satisfaction; the relationship between marginal utility and total utility gives a glimpse of the consumer satisfaction in a certain commodity. Market failure is as a result of the economy’s incapability to allocate resources and it is linked with the role that competition plays in goods and services production. References Friedman D. (nd) The Consumer: Marginal Value, Marginal Utility, and Consumer Surplus. Retrieved 3rd March, 2011 from http://www.daviddfriedman.com/Academic/Price_Theory/PThy_Chapter_4/PThy_Chapter_4.html Information Village (2009) Total Utility and Marginal Utility http://www.info-village.info/total-utility-and-marginal-utility/ Investopedia (n.d.). Economics basics: demand and supply. Retrieved 3rd March, 2011 from http://www.investopedia.com/university/economics/economics3.asp Radcliffe, B. (n.d.). Understanding microeconomics. Retrieved 3rd March, 2011 from http://www.investopedia.com/articles/economics/08/understanding-microeconomics.asp Read More