The Essence of Microeconomics - Essay Example

Mubarak Alhajri Fall - Econ 202-002 Dr. Martin H. Sabo Microeconomics Introduction Microeconomics focuses on market behaviors based on individual consumers and firms. The main aim of microeconomics is to understand the decision making process embraced by households and firms. Microeconomics has its interest on the interaction between buyers and sellers plus factors that determine choices made both by buyers and sellers. In a special manner, microeconomics dwells on behaviors related to demand and supply and determining prices and output in certain markets. On a broader perspective, microeconomics addresses smaller issues, putting much emphasis on aspects of supply and demand. In addition, microeconomics looks into decisions made by businesses regarding production and prices attached to goods and services produced by individual businesses. In general, microeconomics deals with economic decisions made on a micro level (McEachern 13). A clear understanding of microeconomics is essential since it builds a platform through which macroeconomics is constructed. Macroeconomics pays attention to a wider perspective of economic issues. Its main focus is on the national economy in general, providing a basis understanding of how issues relate to each other in the world of business. It is essential to have an understanding of microeconomics and macroeconomics in order to learn how the economy works for a given country. Decisions made by firms and individuals in microeconomics are largely influenced by costs and benefits. In this case, cost can occur in the form of financial cost or opportunity costs. Financial costs can be in the form of total variable costs or average fixed costs while opportunity costs are alternatives foregone (McEachern 14). Discussion Microeconomics has a number of questions that economics under this branch of economy attempt to answer. Examples of such questions include impacts of changes on prices of goods on people’s purchasing decisions, impacts of increased income, and impacts of changes on interests on national savings. Economists are of the opinion that the market has two parts; the demand and supply part. The demand side consists of households, economic agents, and firms. These components of the demand side go to markets to source certain goods and services. The supply side comprises of suppliers who supply goods and services to specific markets. In this case, firms are the main suppliers (Boyes & Melvin 21). In markets holding finished goods, those who demand mainly comprise of consumers at household levels. Contrary to this, the main consumers of capital goods include firms such as a baking industry going for an automated oven. Markets for intermediate goods are also present. In such markets, the key buyers entail firms attempting to buy goods or services that are essential in producing other goods and services. A good example of such markets is a baking industry purchasing wheat flour from millers, or wheat millers buying wheat from farmers (Besanko & Braeutigam 37). Examining demand and supply is done as separate entities since each of them deals with different aspects of a market. However, within concepts of demand and supply there is a common goal, but each has its own distinct goals. Buyers go to the market with the main aim of getting satisfied (an aspect referred to by economists as utility) since they have the potential to construct limited budgets. On the other hand, suppliers focus on maximizing profits through the use of production factors, which include entrepreneurship, capital, land, and labor. They try to maximize these factors in order to maximize on their profit (Boyes & Melvin 24). In any market, concepts of demand and supply depend highly on competition, which implies that there are sufficient buyer and sellers within a market scenario in order to facilitate the biding process. In the case of buyers, bidding occurs against each other, which have the consequences of increasing the price of goods. On the other hand, when sellers bid against each other, the price of goods goes down. An equilibrium point refers to the point whereby bidding has been attained. At equilibrium, no one is willing to give higher prices or part with lower prices. The concept of perfect competition is of concern in microeconomics. This refers to a situation whereby there are many buyers and sellers, which makes buyers and sellers incapable of affecting the prevailing market prices. Contrary to this, imperfect competition prevails when a single buyer or seller has the potential to influence the prevailing market price (Besanko & Braeutigam 41). The concept of demand and supply makes much sense where perfect competition prevails. However, there are extremely few markets that can be termed as perfectly competitive. Of most importance is that concepts of demand and supply offer superb approximation of what is happening in markets regularly. Consumers in relation to markets Demand refers to the “relationship between the price of goods and the quantity of goods or services consumers are willing and able to purchase” (McEachern 12). Quantity demanded refers to the total amount of goods and services a consumer chooses to buy under certain conditions. These conditions include income, price of commodities, price of complements and substitutes, preferences, and population. Apart from price of commodities, the other factors are referred as determinants of demand. The law of demand provides that increases in price of commodities while other things are held constant leads to a decline in the amount of goods demanded. The aspect of holding other things constant is referred to as ceteris paribus/other things equal. In this case, ceteris paribus implies that determinants of demand are held constant (McEachern 13). The demand schedule provides price values for goods and services and their corresponding quantities. On the other hand, a demand curve shows a “graphical representation of the relationship between price and quantity demanded.” Points on a demand curve indicate quantities of goods buyers would prefer to purchase. Changes in demand are realized when there is a change on a single determinant of demand (Boyes & Melvin 20-33). Aspects of producers within markets Supply is the core aspect of producers in microeconomics. It refers to the “relationship between price of goods and amount of specific goods that firms are willing and able to produce and sell.” The amount of goods supplied refers to total amounts of goods that sellers would prefer to produce and sell under certain conditions. Examples of conditions that influence quantity of goods supplied include price of goods, cost of inputs, number of firms within an industry, availability of technology. Apart from the price of goods, the other factors are referred to as determinants of supply. The law of supply provides that increases in price of commodities while everything else is held constant leads to an increase in the amount of goods supplied. In this case, determinants of demand remain constant along a demand curve (Boyes & Melvin 20-33). A supply schedule outlines different prices of goods and their corresponding quantities of supply. On the other hand, the supply curve shows a relationship between price and amount supplied. Every point on a supply curve indicates quantities of goods a firm would prefer to produce and sell at a given price. Changes on a supply curve are as a result of changes on determinants of supply (Besanko & Braeutigam 46). Conclusion In microeconomics, the laws of demand and supply determine the overall price attached to products within a given market. Opportunity cost comes in handy when evaluations are done on undefined markets. Opportunity cost refers to the relative loss of opportunity, which must be dealt with when making investment decisions. Having looked into concepts of demand and supply, it is evident that analysis of microeconomics can be done by examining the impacts of decisions made by individuals and firms on production of goods. Consumers are the key determinants of how the economy will shape up through making of decisions that satisfy consumer’s perceptions on costs and benefits. Works Cited Besanko, David & Braeutigam, Ronald. Microeconomics. New York: John Wiley & Sons, 2010. Print. Boyes, William & Melvin, Michael. Microeconomics. New York: Cengage Learning, 2012. Print. McEachern, William. Microeconomics: A Contemporary Introduction. New York: Cengage Learning, 2010. Print. Read More