Difference between Microeconomics and Macroeconomics - Coursework Example

Abdulaziz Al-mesaifri Essentials of microeconomics Spring - Econ 202-002 Dr. Martin H. Sabo Essentials of microeconomics Introduction Asconsumers, we are forced to make choices every single day. When we opt to buy one thing and not another, that is a choice. We not only choose on how to spend our resources but we also choose on when to spend. This therefore means that every day, with or without our conscious knowledge, we engage in microeconomics (Boyes and Melvin 20). This particular aspect of economics is pertinent not only in an individual or company’s performance but also affects the overall growth of an economy. One consumer makes different purchasing decisions from the other, so do different companies and firms. All this dissimilar decisions and actions are what make up microeconomics. Microeconomics is a branch of economics which analyses and studies the market behaviors and choices of firms and different consumers, all in a bid to figure out why the consumers and the firms make the different decisions that they make, in relation to the limited resources (Arnold 11). Microeconomics, therefore, is concerned with the interaction between buyers and sellers, and all the factors, whether changing or constant, which influences the purchase or selling decisions made (Schmeiser 465). Microeconomics tries to draw a relationship on how these factors and decisions affect the supply and demand of goods and services, how they affect the price and how the overall quantity available for supply and demand available is affected. Microeconomics, therefore, studies and analyses the behavior of an individual unit, such as a business or an individual or sometimes, a particular household (Hoyer, Maclnnis and Pieters 38). Difference between microeconomics and macroeconomics In economics, there are two major branches; microeconomics and macroeconomics (Boyes and Melvin 47; Adil 22). As opposed to microeconomics which focuses on individual, household or business decisions, macro economics deals with a whole sum of all economic issues, factors and activity. It looks at the decisions made by the country and looks at economy in a wholesome angle, at a higher level (Arnold 56). It focuses on aspects such as Gross Domestic Product of a country and how it affects aspects such as employment, consumer spending, growth and development of a country among others. It also focuses on the balance of trade payments of a country and the state of a country’s international trade and exchange. Therefore, whereas microeconomics, as the word suggests, focuses on consumer decisions, demand and supply, macro economics takes the focus to a wider and a higher level, focusing on the economy as a whole (Boyes and Melvin 51). Macroeconomics just like microeconomics is an important concept in economics because it has various important concepts that are essential for economic wellbeing of any country. Macroeconomics has critical elements, which include price stability, equilibrium in balance of payment, economic growth, and employment. It is the central role of any government to ensure that the economy of the country is which it is run has favorable economic policies by use of various fiscal or monetary policies. Much has been said and written by economists about many factors and issues that revolve around microeconomics. In this particular work, focus will be laid on a few key areas of microeconomics. They include demand and supply, opportunity cost and a discussion on consumer demand theory. These aspects will be used to show how important microeconomics is, and how it affects the daily decisions that people, businesses and households make. Before focusing on these key areas, a brief description on the assumption in microeconomics is provided below. Assumption The assumption applied in microeconomics is largely based on the premise that there are unlimited needs to satisfy, yet the resources remain scarce (Arnold 65). This assumption is summarized in the maximizing subject to constraints theory (Boyes and Melvin 65). It explains that when given a choice, consumers will always make a choice to pick the group of items which will leave them more satisfied and from which they will derive the maximum value and enjoyment. For example, take a case of a college student who has only $100 dollars to spend. This student will be forced to make a choice. He or she may desire to buy more than his or her available funds may accommodate. The theory of maximizing subjects to constraints theory proposes that this student will make a choice, and based on his needs, desires and preferences, he will purchase the products from which he or she will reap the maximum value, and will derive maximum enjoyment. Microeconomics also employs the aspect of marginal analysis, a tool which has become indispensable to economists (Arnold 76). Opportunity cost To effectively explain this, the following illustration can be provided. A city has a vast and empty piece of land. It decides that the land should not be left vast anymore. There are many options on uses which the land can be put into. Suggestions including making it a car park, selling it to individuals, making it a sports or football pitch, build a mall on it or set up a healthcare centre are forwarded. All this are viable options but one has to make a choice, make a decision and select what they will feel is the best in terms of satisfaction and returns. Opportunity cost is defined as the cost of foregone alternative and the choices made (Haney 592). Let us assume that the city discusses the list of options and comes up with the best three as construction of a healthcare facility, selling the land to individuals and transforming the land top a car park, in that order of preference, a choice will still have to be made on the best of the three. If they chose to construct a healthcare and leave the second best choice as selling it to individuals, the opportunity cost is foregone by selecting the most lucrative choice. In this case, the foregone alternative is selling the land to individuals, since it was the second best choice. Of importance to note is that opportunity cost is not a totality of all the opportunities that have been forgone, rather, it is the cost of one which was the best of all alternatives (Spiller 595). In the above example, therefore, opportunity cost is not the sum total of all the opportunities that have been foregone but of the single best one which was foregone. In this case, it was the cost of selling the land to individuals and not the total of selling land to individuals, converting the land to a sports field, building a mall and making it a car park. Opportunity cost is a universal aspect, though it varies depending on a particular individual (Spiller 598). Opportunity cost is a result of preference decisions made. Before an individual makes a choice, in microeconomics, one analyses the value that will be generated by opting for one choice and leaving out another (Schmeiser 465). This does not always translate to mean that the item, product or service foregone is less important. Rather, it means that resources are scarce and hence, a choice has to be made. Microeconomics therefore, tries to draw out a relationship between opportunity cost and the effect that it has on an individual, or on a business. Another important aspect to note about opportunity cost is that it does not just involve monetary decisions. It also applies to decisions made regarding the use of time (Spiller 607). For example, a student has a football match to practice, but at the same time, he has to revise for the following day’s continuous assessment tests. He may opt to revise for his exam and forego his football practice and at the same time, he may opt to attend his football practice and make up for the revision by studying at night. In this scenario, there are no monetary decisions to be made, but there is a choice that has to be made. This means that opportunity cost can also be applied to time issues. From the above, it is clear that though opportunity cost is regarded as just a study on choices made, it has a huge impact on enhancing the understanding of microeconomics (Schmeiser 464; Spiller 607). As earlier mentioned, microeconomics is a study on the decisions made by consumers and firms, which affect demand, supply and even the price of a product or service. One cannot understand why decisions are made without understanding the concept of opportunity cost and hence, opportunity cost is undeniably vital and essential in the field of microeconomics. Demand, Supply and microeconomics Demand and supply in a market are among the key factors that influence the choices and decisions made by a consumer. They are key determinants of how affordable or otherwise a product is. The general law of demand and supply in any market implies that the price at which any particular commodity is sold will keep on fluctuating, increasing or decreasing at different times until that point where the quantity demanded by consumers (at that particular price) balances with the quantity that will be supplied (Boyes and Melvin 48). This interaction of forces demands that if a seller sells his products at a price above the equilibrium price, there will be very few buyers. On the other hand, if he or she sells at a price below the equilibrium price, there are losses likely to occur. This equilibrium point is as shown below. Figure 1: Demand and supply curve: Point of equilibrium This shows the major role that demand and supply play in affecting the purchasing decisions that are usually made by consumers. To further understand the relationship between microeconomics and demand and supply, it is important to know the four basic laws of demand and supply. The first law states that whenever demand increases (leading to the shift of demand curve to the right) and the supply does not change, there will be a shortage, and hence the equilibrium price will rise (Boyes and Melvin 49). The second basic law states that if there is a decrease in demand (leading to a shift in the demand curve to the left side) and the supply does not change, there will be a surplus and as a result, the equilibrium price will be lowered (Boyes and Melvin 50). The third law states that when the supply increases and the demand remain stagnant (hence the supply curve shifts to the right), there will also be a surplus, and as a result, the equilibrium will be lower (Arnold 133; Boyes and Melvin 50). Lastly, if the demand does not change and the supply decreases, (the supply curve thus shifts to the left), the market will experience a shortage, and as a result, the equilibrium price will be high (Boyes and Melvin 53). In microeconomics, the equilibrium intersection is very important in determining the behavior of consumers. It is that point where the quantity that is demanded by the consumers and the quantity supplied. Market equilibrium, which is commonly applied in microeconomics, is the point at which that amount of quantity that the consumers need (demand) is able to be met and supplied by the suppliers (Boyes and William 59). In microeconomics, studies are usually done on how different changes in demand and in supply relates to the purchasing power of consumers. To further understand this, it is wise to look at the demand curve shifts and the supply curve shifts, aspects considered imperative in microeconomics. Demand curve shift An increase in demand arises when at a particular price, consumers increase the need for a particular commodity (Belk, Scott and Askegaard 48). This makes the demand curve to shift to the right side to depict the increase and greater demand of the commodity. This shift of the curve takes place from D1 to D2 and as a result, the equilibrium point rises from Q1 to Q2. This is as represented in the figure below. Figure 2: Shift in demand curve Shift in a demand in any competitive market may be as a result of many factors. These factors include a change in the value of consumers’ disposable income, the increase or decrease of prices of complimentary or substitute products, the number of available buyers and the forecasted market conditions and expectations (Hoyer, Maclnnis and Deborah, 140; Boyes and Melvin, 60). All this factors are responsible for the shift in the demand curve, hence altering the change in the equilibrium quantity. These factors are among the many that affect the decisions of a firm on how much products to produce or at what price to sell to the consumers. Consequently, the consumers have to make a choice on what to purchase, keeping in mind their need to derive the most utility and maximum value to be derived from the products to be purchased (Haney, 594). Shift along the supply curve The most common factor that leads to a shift along the supply curve is the change in use of technology, usually to an increase and improved technological version (Adil 88). Let us take an example. Let us assume that a company comes up with a technology that makes it possible to produce and manufacture shoes which are of a better quality and use less resources than before (lowers the cost of production). People will be more than willing to purchase the shoes at the price set by the company, hence lead to a shift in the supply curve. The curve will move from point S1 to S2, and consequently lead to a decrease in the point of equilibrium from P1 to P2. In addition, the equilibrium quantity in the supply curve will also rise as more consumers will be more willing to buy the shoes at the lowered cost. This shift is as represented in the diagram below. As seen above, demand and supply affects the choices and decisions made by consumers. The prices and the quantity supplied greatly determine whether an individual will buy all the commodities of their choice, and if so, how much they will buy (Belk, Scott and Askegaard, 114). In addition, it also pressures firms to make decisions from which they will get the maximum profits for their products. Microeconomics embarks on interpreting all these decisions and also studies the factors that affect these choices. Issues such as the availability of substitute products, the disposable income available and the expected changes in the market are also considered in microeconomics (Boyes and Melvin 122). Demand and supply, therefore, are vital elements in this branch of economics. Consumer demand theory As earlier mentioned, among the key aspects in microeconomics is the consumer demand theory which forms a backbone in the study of microeconomics. The consumer demand theory is a theory in microeconomics which attempts to draw a relationship between the consumption and purchase of goods and services and the expenditure incurred by people(Boyes and Melvin, 186). The consumer demand theory is an analysis which tries to find a way or a point through which consumers may achieve a balance between their preferences and desires and the value of their expenditures. This, as economists advice, can be achieved by a consumer maximizing utility on a product even though restricting it to budgetary constraints 9Hoyer, Maclnnis and Piters, 188). In this case, preferences are those desires that any individual has to access and consume some services and products. This later translates to choices that will be made, and which will be determined by the value and amount of a person’s wealth or income. Some people often wonder why consumer demand theory is considered the backbone and a key element of microeconomics. The answer to this lies to the fact that consumer demand theory makes it easier for microeconomics experts and researchers to greatly rely on information generated through this theory (Belk, Scott and Askegaard 200). This theory is devoted to analysing and studying different consumer habits and behaviors, and also relates this to all decisions that firms and individuals make with regards to the ability, or lack of it, to purchase desired goods and services. The consumer demand theory is largely rooted and revolves around the importance of maximum generation of utility which is acquired when wants and needs are satisfied. This theory was first proposed in the early 1700 when Jeremy Bentham introduced the use of the term utility and used the term to describe the fact that desire to fulfill utility is what pushes and motivates people (Boyes and Melvin 180). To him, utility was an aspect that could be measured, more likely like the mass of a body. This concept was further built-on and modified by other economists such as William Stanley. This economist tried to draw a relationship between marginal utility, consumers’ behavior of purchasing goods and the prices of products (Adil 189). Today, the theory of consumer demand remains a largely applicable theory in explaining why people make the purchase and consumption choices that they make, and in so doing, it helps to advance the field of microeconomics. It entails analysing how people divide and sub-divide their scarce resources to acquire the products that provide them with the most satisfaction. Conclusion and suggestions Microeconomics theory was introduced a long time ago. However, people do not fully understand what it entails. The simple act of making choices, especially when purchasing products is an aspect best explained by microeconomics. The basic theory of demand states that when the price of a product increases, the demand for it will decrease (Adil 55; Boyes and Melvin 48). This is because resources are the main determinate on the choices that people make. This field has proved quintessential to companies and firms, and even to countries in making policies. It has been applied in determining the amount of labor supply that will be available, household production units among others. However, even though the field of microeconomics is imperative in the development of any society, basic and advanced knowledge on how it can be applied in the vast consumption areas should be provided. Further research on how the quest for utility satisfaction affects the choices made by consumers should also be carried out. In addition, recommendations should also be made on how companies can relate their levels of production and sales with the consumer behaviors. Works Cited Adil, Janeen. Supply and demand. London: Capstone. 2006. Print. Arnold, Roger. Microeconomics. London: Cengage Learning. 2013. Print. Belk, Russel, Scott, Linda, and Askegaard, Soren. Research in Consumer Behavior: Volume 14. New York: Emerald Group Publishing. 2012. Print. Boyes, William and Melvin, Michael. Microeconomics. London: Cengage Learning. 2012. Print. Haney, Laurne. Opportunity cost. American Economic Review. 2(3), 590-602. 2012. Print. Hoyer, Wayne, Maclnnis, Deborah, and Pieters, Rik. Consumer Behavior. London: Cengage Learning. 2012. Print. Schmeiser, Sally. Consumer preference changes in the logit demand model. Applied Economists Letters, 21(7), 463-465. 2014. Print. Spiller, Stephen. Opportunity cost consideration. A Journal of Consumer Research, 38(4), 595-610. 2011. Print. Read More