Why are seniors receiving discounts on public transportation systems? Such questions are considered to be microeconomic, as they are focused on markets or individuals in an economy. Microeconomics also analyzes market failures where productive results are not achieved. Game theory is a major method used in mathematical economics and business for modeling competing behaviors of interacting agents. The term “game” here implies the study of any strategic interaction between people. Competition acts as a regulatory mechanism for market systems, with government providing regulations scope of micro economics where the market cannot be expected to regulate itself.
Formulation of Public Economic Policies
Microeconomics focuses on how a change in price affects the quantity demanded of a specific good or service, while macroeconomics studies the overall effects of changes in aggregate measures such as GDP or inflation. The law of supply states that an increase in the price of any commodity will lead to an increase in supply and vice versa, all other factors being constant. The producers attempt to maximize their profit by increasing the quantity when the price rises. According to the production input value theory, the price of any item or product is determined by the number of resources spent to create it. Cost may include several of the production factors (including land, capital, or labor) and taxation. Technology may be regarded as either circulating capital (e.g., intermediate goods) or fixed capital (e.g., an industrial plant).
Markets can be of various forms or structures, beginning with Perfect Competition, Monopolistic Competition, Oligopoly, Duopoly, Monopoly and, Monopsony). In addition to standard tools of Geometry and Calculus, Game Theory is often used to analyze the various strategies suitable for the various markets. So after the analysis of Consumption and Production comes the analysis of Markets. During this Depression, both Europe and America suffered along with their colonies in various parts of the world.
Consumer Choice and Demand
- Monopolistic competition is a situation in which many firms with slightly different products compete.
- In microeconomics, the law of demand states that the quantity of commodities demanded by consumers varies inversely with prices of the commodities, all other factors being constant.
- The classical economists presented the “Utility Approach” or “Cardinal Approach”, while the Neo-classical economists presented”.
This definition established the character of the subject for a long time to come. In the second half of the 18th century, there emerged economic thoughts that go by the name Physiocracy. It emphasized the role of land and agriculture in ensuring a country’s prosperity.
Inner Cost
The last central problem of an economy after deciding what and how to produce is for whom to produce. As an economy cannot satisfy the needs and wants of every individual of the society, it has to make a decision for who to produce a commodity and service. Simply put, it involves deciding who should get how much of the goods and services, i.e., how much production should be done for the poor and how much for the rich.
- The problem of scarcity can occur because of an imbalance between community needs and available production factors.
- The main tools of Macroeconomics are Aggregate Demand and Aggregate Supply.
- Positive microeconomics could help an investor see why Apple’s (AAPL) stock price may fall if consumers buy fewer iPhones.
A market structure that is generally non-competitive will occur if the company does not have the power and ability to influence the amount of certain goods and their prices. Sellers and consumers have a rational nature, where sellers want maximum profit, while consumers or buyers need optimal satisfaction, both in terms of quality and price of goods and services. The behavior of these sellers and buyers can be analyzed using assumptions and it is necessary to pay attention to their economic activities which are carried out rationally and openly. In this economic concept, there must be interaction in the goods market. This place then becomes a meeting place between sellers and buyers to make real buying and selling transactions.
Scope of Microeconomics
Microeconomics helps in determining the factor prices for land, labor, capital, and entrepreneurship in the form of rent, wage, interest, and profit respectively. Land, labor, capital, and entrepreneurship are the factors that contribute to the production process. The cost-of-production theory of value states that the price of an object or condition is determined by the sum of the cost of the resources that went into making it. The cost can comprise any of the factors of production (including labor, capital, or land) and taxation. Technology can be viewed either as a form of fixed capital (e.g. an industrial plant) or circulating capital (e.g. intermediate goods).
Market structure is determined by various aspects, such as the number of buyers and sellers in the market, the distribution of market shares between them, and how convenient it is for the companies to enter and leave the market. The technical assumption that preference relations are continuous is needed to ensure the existence of a utility function. Although microeconomic theory can continue without this assumption, it would make comparative statics impossible since there is no guarantee that the resulting utility function would be differentiable. Positive microeconomics could help an investor see why Apple’s (AAPL) stock price may fall if consumers buy fewer iPhones. It could also explain why a higher minimum wage might force Wendy’s (WEN) to hire fewer workers.
On the consumer side, their efforts include rigorous mathematical modeling of utility that incorporates altruism, habit formation, and other behavioral influences on decision making. One such market is the goods market, in which firms make up the supply side and consumers who buy their products make up the demand side. Different goods market structures require microeconomists to adopt different modeling strategies. For example, a firm operating as a monopoly will face different constraints than a firm operating with many competitors in a competitive market.
For example, the market demand curve, which is the aggregate of individual demand curves, is also a subject of study in microeconomics. Composition and allocation of total production fall under the scope of micro-economics study, whereas under macro-economics we study the level of aggregate production. So, the definition of microeconomics is to have the main goal for companies, namely to analyze the market and how the mechanism in forming the relative prices of products or services. Microeconomics is also called price theory as it studies the pricing of goods and services and the factors of production. The basic elements of microeconomics are goods and services, prices, markets, and economic agents like consumers, firms, and government.
However, a rich farmer can adopt capital intensive techniques as he can afford to purchase machines. With limited resources, an economy cannot produce all goods and services. Therefore, the first central problem of an economy includes selecting goods and services to produce and the number of units or quantity of each commodity to be produced. For example, a farmer has to make choice between different crops as to which he should grow on one piece of land. He can decide to grow one crop of the whole land or grow different proportions of more than one crop.
Usually, there are two techniques of production, labor intensive techniques, and capital intensive techniques. The former technique involves more use of labor, and the latter involves more use of machines. An organization can decide the technique based on different factors like the nature of the product, size of the market, size of the location, budget, etc. For example, a poor farmer can adopt labor intensive techniques as they are cheap.