The Principles and Motivating Force of Microeconomics - Term Paper Example

Microeconomics Introduction Microeconomics is a branch of economics that deals with behavior of an individual firms and households towards decision making about the allocation of limited resources. Alternative, Microeconomics may be defined with the markets domain where it applies to market where goods and services are bought and sold. It examines how the market behavior and decision can affect the supply and demand of any good or service within the market domain. It also analyzes factors the affect prices and how these prices affect the quantity of goods or services supplied to or from a given market. Moreover, Microeconomics also examines factors affecting the demand of certain goods and services within a particular market domain. On the other hand, macroeconomics often engulfs the sum total of all the economic activities that related to economic growth, unemployment, and inflation. Notably, microeconomics often deals economic policies that usually influence or affect a nation. Therefore, microeconomics is an aforementioned phenomenon of economy. Some of the areas of the economy affected by microeconomics include the taxation levels of a particular country. For instance, the emergence of Lucas analyzes lead to the introduction of the modern macroeconomic theory that is defined upon the basic assumptions of the micro level behavior. Among the main aims or objectives of the microeconomics is to analyze the market mechanisms that defines relative prices of goods and services as well as determining the allocation of limited resources within the many alternative and competitive users and uses. Additionally, the microeconomics often analyzes the market failure especially when the market has failed to produce desirable and efficient results. In such a situation, the market analyzes deploy the use of the microeconomic phenomena to describe the theoretical conditions that are needed for perfect competitions. The most desirable areas of study in the microeconomics include the market symmetric information, general equilibrium, uncertainty principles, and applications of the economic game theory. Furthermore, microeconomics helps in analyzing product elasticity within a market system. Assumptions and Definitions The supply and demand theory often assumes a market is ever perfectly competitive. This means that there are numerous sellers and buyers within a market domain but none of them has the capacity to essentially the influence the prices of services or goods within that market domain. However, in numerous real life situations, transaction assumptions often fail because some individual sellers or buyers have the capacity and the ability to interfere with prices of the goods or services. In most cases, elaborate analysis is often required in determining and understanding the demand supply equation of a perfect model. Nonetheless, the theory often performs best under the following assumption: The mainstream economics never assumes a priori that the market effective in the social organization forms. The situation that leads to these analyses is cases where the market failure has led to allocation of resources that are below the expected standards. These situations often defend classical spending. For instance, a business becomes profitable to stakeholders or users but not profitable for any individual funding. The emergence of such cases often compels economists to find policies that will evade waste that may be contributed directly by the government control, or indirectly by regulation. The indirect inductions will often induce participants in the market to act consistently with optimal welfare. Alternatively, they may act by creating the missing market to facilitate efficient trading that no one has ever existed. The mainstream economics study is usually in the field of public choice and collective action theory. The optimal welfare is often defined on the Paretian normal that is mathematically applied in the Koldor-Hicks method. This theory or concept usually aims at maximizing utility towards Utilitarian market. However, it does not distribute goods between people. Notably, any market failure in a positive microeconomics is often limited in its application without introducing or incorporating economists’ theories and believes. Individuals’ demands for various goods are usually considered as an outcome of the process of utility maximizing process where each individual is trying to maximize their own utility. Therefore, the relationship between quantity and prices demands of particular goods are often interpreted after assuming that all other constrains and goods are set at a some choices that intends to make the customer happy. Mode of operation In most cases, it has been assumed that all firms often follow rational decision-making process that leads them to the profit maximizing output. Under this assumption, any firm’s profit can always be considered in four distinct categories. Firms are considered to make economic profit when their average total costs are less than the prices of every additional product within the profit maximizing output. In this case, the economic profit is usually considered equal to the amount of the output multiplied by the difference betwixt the price and the average total cost. Firms may also be considered to make normal profit. This usually emerges when the firm’s economic profit totals to zero. This scenario arises when the price equals the average total cost at the profit maximizing output. The firm may make a loss in loss-minimizing conditions. This state is usually realized when the prices between average variable costs and the average total costs are equal at profit maximizing output. At the state, the firm should be encouraged to continue producing since failure to will lead to much loss. Moreover, the continued production will offset the company’s variables costs especially one of its fixed costs will be offset. In fact, if a company stops it will likely to lose their fixed costs. The last effects are usually defined by the prices going below the average variable cost of the firm. In this situation, it is advisable that the firm shut down its operations. However, the firm may decide to minimize production by elevating its production. Nonetheless, any production in this situation will not offset the fixed costs significants. The total loss of the fixed cost often leads firms into immense challenges. Application of Microeconomics in the Real Business World Opportunity Cost Opportunity costs in any business venture any is regarded as most foregone alternative. The most forgone alternative is that potion that the business has dropped over the option it has picked; otherwise, it could have been taken. Importantly, if the first option fails, the organization automatically resorts to the most forgone alternative. Notably, the opportunity costs can sometimes be difficult or hard to quantify since the effects of opportunity costs are ever universals and are quite real at an individual levels. This principle is quite vitals in all levels of decision-making processes. Tracing from the contribution of Friedrich von Wieser, the principles of the opportunity cost can be marked the foundations of the value marginal theory. Opportunity costs usually health economists to measure the actual cost of a good or services that the company is operating. Other than adding identified costs from a given project, the economists often analyze the identified cost to identify the next best alternative to use the same money. Notably, the profit of the most forgone opportunity usually is the original choice opportunity cost. For instance, a farmer may choose to farm on his land rather than rent it to the other farmer. In this case, the opportunity cost is the profit that is forgone from renting the land. The reason why a framer may not rent the farmland may be that he needs to generate more profit more by himself while working on the same land. Additionally, the opportunity of a student to attend the University for learning is the wage lost that the student could have earned if he could have joined the workforce. Moreover, wage loss of the student may be evaluated as the cost of books, tuition, among other items used during the study. It is important to note that the opportunity cost is not the sum total of all other available alternatives, but the benefit of a single best alternative. For instance, the possible opportunity of the decision of a city to build a hospital on its empty land may be the loss of that land for the sporting activities. The other opportunities that the city could loss include inability to sell the land for profit, to use it parking lot, among other various activities. It should be noted that not all these activities are opportunity costs, rather the most lucrative of all these is the opportunity cost of constructing the building instead undertaking it. It has been quite difficult to determine and calculate the money value of each of the alternative opportunity; nonetheless, each of the involved assets must be used to evaluate the alternative opportunity costs. For instance, making decision concerning the environmental issues may be difficult since its monitory values are quite difficult to evaluate. Furthermore, valuing human life or the economic value of spill oil towards making constructive task that needs critical identity constructive objectives. The decision made may be of diverse ethical implications; thus, it is the responsibility of the economists to help in arriving at constructive conclusions. Imperatively, it is quite essential to note that every decision has effect no matter what the action may be decided. An example of deciding on an opportunity cost may be regarded as making a decision of doing a concert over that of doing homework. Going for a concert will make one give up a valuable time for doing homework. On the other hand, doing homework at the expense of the doing the concert will also translates to the opportunity cost of the concert. Thus, any decision towards locating capital also rates in the same way where there are opportunities for capital that defines the expected rate that the involved party is likely to obtain from a similar project in the market. Therefore, opportunity cost is a vital tool in understanding microeconomics and its related decision making phenomena. Monopoly of Markets and Unemployment Other than helping in understanding the pricing matter that determines the understanding the capital market, microeconomics also helps in understanding some vital market phenomena including market monopoly. Monopoly is the restriction of production by a single business entity that has market power to pose such restrictions. The monopoly economics can sometimes be regarded as a privately imposed tax collection. In fact, sometimes in history, some feudal rulers endorsed their sympathizers with certain monopoly rights over some goods and products. These firms could get in contract with other firms and instruct the produce their products at relatively low prices. However, despite the reduced cost of production, these companies still passed their burden to the customers with the aim of maximizing the profit. This phenomenon is also known as the “monopoly markup” and it has functioned just like taxation. Apparently, the entity that often benefit from the monopoly is the monopolizing power; otherwise, the producer and the customers are usually losers in this game. Despite civilization and advancement in human understanding, there are still models of modern monopolies that are less transparent. The modern monopolies include a situation where the government grants monopolies to producers. However, some monopolies often happen without the involvement of the government. The monopolies that do not involve governments are often short-lived. Whichever way, the monopoly markup, or the tax returns often benefits the monopolizing firms. The nature of the effects posed through monopoly can only be analyzed through competitive wage that analyzes the nonunion segment of a given economy. In the case of monopoly, wages usually lower because the wage of the union led to hiring of few workers within the unionized firms thereby leading to enormous labor supply. This is where the micro economist will analyze the effects governments on the unemployment rate within a given economy. Rent Seeking and Unemployment Sometimes the government may make the prices of certain commodities or business ventures unusually high. For example, a city may impose high official meter rate but do not regulate the entry into the taxi business. Therefore, this high fare rates must cover driver’s payment and a market rate return on the capital cost of operating the taxi. The underlying conditions will allow capital and labor to flow into taxi industry until a point where the involved entrepreneurs will only expect a normal return instead of high returns. In this situation on would expect the fare of hiring a taxi to shoot very high. The reality is that there will be many cabs but few passengers; thus, they will need to extract much form the customer to maintain their normal profit. Another situation of rent seeking often occurs when there is high artificial urban wage that attract rural migrants into urban market. In this situation, micro economists will analyze the situation and preempt that, if the wage is not adjusted downwards to meet the supply and demand, then the unemployment rate in the urban area will increase until further migration into the urban is deterred. Conclusion The greatest unifying principle of microeconomics is the supply and demand. In all business ventures, supply and demand are directly promotional. Any change detected in the supply will adversely affect the demand thereby affecting the price of the commodity involved. However, the motivating force in the microeconomics is that human labor is always gravitating toward choices and arrangements according to their taste. Notably, the human taste affects demand and supply in all are of business; therefore, microeconomics cannot ignore the human behavior in any market. Read More