micro ecomomics

micro ecomomics

The Importance of Microeconomics in Understanding Economic Behavior

1. Introduction to Microeconomics

Due to the universality of the “economy” in our daily lives, those who live on earth must know more about the “economy.” Within this category that includes hundreds of issues related to this science, which is as vivid as we use it daily, microeconomics is as important as macroeconomics. Everything is related to us, people, and our entire economic activities. We all need to find the opportunity to research before buying a good, deciding what to consume, and choosing the job we will work on. Also, during these economic activities in the world, there are many problems and challenges to be faced. Therefore, we must try to understand the work of economics for a healthy environment, favorable for individuals and the country itself. In this context, microeconomics takes on a significant role.

Although economics is mainly divided into two categories, microeconomics and macroeconomics, it is a bridge between the two categories. Microeconomics, which examines the workings of the economic system of people or economic units (such as individuals, households, businesses, etc.), studies the financial behavior of these entities and demonstrates how they influence the behavior of the macroeconomy through some mechanisms. Under macroeconomic systems, microeconomic phenomena take place and hence result in macroeconomic impacts. So, microeconomics is the basis for macroeconomics. That is why they have become an essential tool in understanding both sides of the economy.

2. Supply and Demand Analysis

Producers will increase their output whenever it becomes large enough to create a need for additional production. Since suppliers will not respond as the demand curve shifts by reducing price, equilibrium will only be maintained if buyers only, and verifiably abnormal markets will occur. All these insights, though involving strict assumptions, can be known by observing only the market as consumer and producer decisions. These first models are still taught in every Principles of Economics course but more is taught later regarding consumer preference structures. This opening unit does not involve much choice in consumer preferences. Only choice in consumers is concerning brand quality since the model involves finding consumption targets so the model assumes that individual consumers know what they need.

The first models any student of economics learns to provide insight concerning the world involve supply and demand. The required assumptions are that all markets are in equilibrium, market forces shift equilibrium, that consumers can change brands, and the existence of sufficient knowledge of future events. All markets communicate through prices, with increases in price causing an item to be priced directly out of some people’s ability to pay and causing additional suppliers to provide the item. Thus, a higher price causes a reduction in the quantity of a good cleared in the market, with this quantity sensitive to the monthly budget consumers have available to spend. The data are consistent with the predicted effect of the price moving in the correct direction to cause both buyers and sellers to adjust the quantity brought to the market.

3. Market Structures and Competition

A monopoly exists when a single firm is the sole producer of a good which has no close substitutes. In the case of perfect competition, firms are price takers because of the large number of competitors. If they raise their prices, they will lose their customers to other firms. For the same reason, the entry of new firms is not a problem in the long-run. Their entry will force these monopolistic competitive firms to charge a price equal to average cost, P=AC, and they will make zero profit. The market structure of perfect competition maximizes social welfare because price is driven to a minimum through the decisions of many competing firms. Monopoly, on the other hand, promotes inefficiency by causing price to rise above marginal cost. For this reason, efficiency is defined as P=MC only under perfect competition. Under all other market structures (monopoly, monopolistic competition, and oligopoly), there will be divergence between price and the MC. In the case of monopoly, the price becomes higher than the MC.

Although there are many markets in the economy, in many cases they can be broadly categorized into four types of markets: perfect competition, monopolistic competition, oligopoly, and monopoly. To explain these market structures, some basic concepts have to be introduced. First, the downward sloping demand curve facing the firm in the monopolistic market is not the demand curve of the firm. Rather, it represents the demand curve of the product. Monopolistic competition is a market structure characterized by many independent firms which produce a highly differentiated output. Because of the many firms and the highly differentiated output, there is no one good represented by the firm. The demand curve of individual firms cannot be horizontal as shown in the case of perfect competition. In all markets except monopoly, P has to exceed two conditions won’t hold.

4. Consumer Behavior and Decision Making

In microeconomic theory, a consumer’s involvement is explained by a utility functional form, namely U = f(X1, X2, …, Xn; p1, p2, …, pn; m), given income and the prices of various goods and services. A consumer’s involvement in theory covers a variety of aspects, including the peculiar behavior of demand. The indifference curve technique and indifference curve map are used to derive consumer’s demand curves and to explain the peculiar behavior of demand.

A consumer entirely consumes their money income. The level of a consumer’s income affects the amount of commodity they purchase. It is also influenced by various other factors like the pattern of income distribution, age, taste, trend, etc.

3) At what level of prices and income do they consume their goods?

Different goods yield different amounts of satisfaction to a consumer. This is also related to the increase or decrease in satisfaction when a consumer makes purchases. The price and satisfaction determine the demand.

2) How much of a good to purchase?

Since resources are scarce and a consumer’s income is limited, the satisfactory allocation of their money income among the array of goods and services is very important for optimizing satisfaction. They make adjustments in their decisions about what quantity of a good to buy or what quantity of another good to buy by comparing the price of a good and the satisfaction they derive from it.

1) What to buy with their limited money income?

Microeconomic theory explains how a consumer allocates their income among different goods and services in order to attain the highest level of satisfaction, and how a consumer’s equilibrium position can be established through their behavior. For a consumer, goods and services are the means to satisfy their wants in any situation. The scarcity of money income creates a decision problem. In a free enterprise economy, the consumer is sovereign. The following crucial decisions are made by a consumer in this economy:

5. Government Intervention and Economic Policies

As can be seen, in the definition of economic policy introduced in Chapter 1 as a description of individual actions. In economics, anyone or any collective can formulate economic policies, regardless of whether you are attending these courses because there is a difficulty in economic approaches.

The introduction of economic policy analysis into earlier chapters shows that economic policy making is not exclusively a design feature, as characterized by Christensen and Soule. We reject the Christina and Soule description entirely, as we initially excluded the private economic policies. We have explained why hedging economic policies have been functional only in economic planning, as in microeconomics. And we discussed that any individual can certainly make a reasoned microeconomic policy if he has some knowledge of how the instruments are intended to work.

The economic policy field extends as indications, asiable standards of conduct, not as laws and recommended rates of wages or as directives or tax levels. But it also includes a set of typical private and governmental economic market interventions.

Economic policies can be implemented by two large groups: the government and the private sector. Governmental policies correspond to policies based on the use of tax and public spending of public goods, while private policies depend on private pricing actions and private tax and transfer exercises.

A public policy is defined by a managerial decision, in short, a decision concerning economic behavior made prior to the occurrence of such behavior, which leads to a resolution and to economic conduct in order to cause certain individuals to act. In social indicators, policy is nothing more than a type of economic market intervention. The determination of a price floor or a very low price ceiling for a product results in residual markets.

Given the nature of the problem, the Beyond Microeconomics box focuses mostly on public issues, specifically government intervention and economic policies. It is by no means implied, however, that the theories, concepts, and models presented here should be used only by governments. Individuals, firms, community associations, and national and international organizations can also adopt modern economic policies at their respective levels.