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Examining the Elements of Microeconomics

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Published: Thu, 20 Apr 2017

What is the studying of microeconomics? How is it useful to me? Microeconomics is a branch of economics that studies the behavior of how companies make decisions on their limited resources. It is very vital that we learn economics for its benefits can help us in economical crisis. There are many benefits that studying economics gives: learning to manage under scarce resources, learning to predict how the demand and supply growth behave, learning how to use economical crisis as a chance, and learning how to make the wisest economical choices. Some of the concepts of microeconomics are the nature of supply and demand, and applying them in the market field. [1]

The Law of Demand

According to Robert L. Pennington, author of Holt’s Economics textbook, the demand is the amount of good that a consumer is willing and able to pay at various possible prices. One of the most important conditions is that people must not only want the product but must also be able to pay for it. [2] Let’s see one example that describes the principles of demand. Suppose you want to buy a computer for 10,000 baht. However, after seeing the prices you found out that there wasn’t a computer cheaper than 15,000 baht. Even if you were able to pay the higher price, you might be willing to. This example describes the law of demand which is an inverse relationship between the increase in a good’s price and a decrease in the quantity demanded. Several other concepts like the income effect, the substitution effect, and diminishing marginal utility will help explain the law of demand.

Purchasing power is the maximum amount of money people have in order to spend on goods and services. If there is an increase in a person’s income, the purchasing power will increase too. The change in a consumers’ purchasing power caused by a change in price is the concept called the income effect. [3] The income effect has a strong and very promising effect on the quantity demand. For example, a consumer who spends 20 baht for two bags of chips can buy 4 bags of chips at the new price of 5 baht each.

Another factor that we must considering is called the substitution effect. The substation effect is the probability that consumers will substitute a more expensive product to a similar, lower-priced product [3]. One great example would be a consumer who had to buy Pepsi drinks. Even though the price of Pepsi might increase to 30 baht per bottle, a consumer could decide to switch to buying Coke as it is cheaper and can satisfy the buyer’s needs. However, it is important to note that the substitution effect varies between products. Most people would switch to lower-priced product if they are absolute that they can have very similar satisfaction.

The last important concept discussed in law of demand is the diminishing of marginal utilities. Diminishing marginal utility is the idea that the more frequent you consumer a product, the less satisfaction you will receive from it. Consider drinking your first cup of Starbucks Coffee. During your first time, you would do anything to drink more of it. But as you drink more cups of coffee, you start to lose the excitement you had during your first cup. Understanding diminishing marginal utility helps explain why there are also limits to the demand of a product. If you had drink 3 cups of coffee in the morning, you would be too full to drink another cup more for the meal. You’d also be bored to the taste. [4].

Changes of Demand

Why do demand change? Some of the reasons are a change in consumer’s preferences, market size, income and prices. These factors play a great role in the overall demand for goods and services. [5]

The consumer’s preferences can change due to time or certain events. For example, when you were a kid, you might enjoy watching cartoons like Transformers. But as you grow older, you come to grow bored of it and prefer something that can give you more excitement. As time goes by, people tend to have a change in their preferences. However, if there was a major event like a Transformers Movie Premiere in Thailand, you might regain some excitement of the childhood show you loved. This can cause an increase in demand and the demand curve will shift to the right as people are willing to buy tickets to see the show. Another factor is the market size. As time goes by, the market size might expand spreading more of their products or services around the world. The market would expand to more consumers increasing the product demand. However, if a person’s budget is not able to enough for the product’s prices, the demand curve shift can move to the left. Unless the price of the product goes down, this person wouldn’t be able to afford the product. This is one of the major reasons why price and income greatly affects the demand.

Elasticity of Demand

According to Wikipedia, the elasticity of demand is “a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price.” The demand of a product can be either elastic or inelastic. [6]

An elastic demand occurs when causing a small change in the good’s price can bring a big opposite change in the quantity demanded. Some of the reason why a good’s elasticity can change is because the product is not essential, there are other substitutes, or the price is too high. The graph below shows an elastic demand curve. As the price of the product decreases, the quantity demand of the product increases. When the price of the product was high, there was a drastic change in quantity as people might not be able to afford them or they could look at substitutes. In the second graph, P1 and P2 stand for the price while Q1 and Q2 represent quantity at a period of time. The graph demonstrates the relationship between price and quantity as an increase in price causes a decrease in demand.

An inelastic demand occurs when increasing the price doesn’t greatly affect the quantity demand. Some of the reasons why products have an inelastic demand are because they are essential have no substitute, and cost cheaply. An example of an inelastic demand good is insulin. A diabetic person must have insulin even though the price might increase. It is a necessity and they couldn’t live without it. Some examples of an inelastic demand graphs are shown below. In a perfectly inelastic demand curve, no matter how high the price would be, there would always be the same quantity demand as people depend significantly on it.

Supply

According to Investopedia, the law of supply is “a microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity of goods or services offered by supplier’s increases and vice versa. [7] Suppose a company decides to charge 30 baht instead of 20 baht for a bag of chips. This would allow them to make more chips than before. The higher the price will lead to a large quantity of chips supplied. The elasticity of supply is how much prices changes affect the quantity of a good. For example, a sports poster is a product that has an elastic supply. This usually means that the product is made quickly, inexpensively, and uses readymade resources. However, a product that has inelastic supply curve requires great deal of time and money to make. An example of an inelastic product is diamonds as it requires people to go through a great deal of work in order to scavenge the element. Some of the factors that affect the supply shift are prices, technology, and competition. If a company is able to cut cost in their production, they would be able to make more profit.

Market Structures

Study of market structure is considered as one of the most important topics in Microeconomics. It is significantly important to master this topic to understand the concept of microeconomics. Market structure is an organization and characteristics of different types of markets. There are many subtopics that are concluded in the topic of market structure, which are: Perfect competition, monopolistic competition, oligopoly, oligopoly, monopoly, natural monopoly, and monophony.

A competitive market is a number and distribution of the firms indicated, in the market competition. This is the analyze of the most competitive market to the least competitive. According to Econguru.com, “Perfect competition, which is the most competitive, consists of a “large number of firms, which produces homogeneous product, market make is well informed no barriers to entry for both seller and buyer” [8].

Applied Microeconomics

By studying microeconomics, many people can use it in their everyday lives. Whether you are a doctor or an accountant, topics like supply and demand can be applied in almost every field. For example, a public finance might look at the plan of government tax and economic effects of these rules. Doctors or dentist can use health economics which is about the organization of health care systems. This would include the importance of the health care employees and health indemnity programs [9]. Studying microeconomics can help high school students understand calculus topics too. Because calculus, physics, and economics are so integrated to each other, studying microeconomics could really help the other.

Conclusion

Throughout this term paper, we have discussed many of the factors of microeconomics and how each of them plays a role in the field. Microeconomics allows us to see how both consumers and businesses make financial decisions. Even though there’s a variety of choice one can make, the principal determinant for the consumer is price. One interesting lesson from microeconomics is how we can use math equations to describe individual decision. Though we cannot be perfect with it, there is still great accuracy in calculating this in the real world at economical situations. One of the things we enjoyed learning is how one thing is so dependent to the other. In economy, it is very important that each company become independent in order to be successful.


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