Economics and Microeconomics
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Economics, as the dictionary meaning says, is a branch of knowledge that deals with the human activities relating to wealth. There have been different views of theorists about the explanation of economics, the key Economists being Adam Smith, David Ricardo, John Stuart Mill, Karl Marx and John M. Keynes. Combining all the views and perspectives, Economics can be defined as the study of how society allocates scarce resources and goods. It is easy to understand that human and property resources are limited, so it is natural that goods and services produced must also be limited. In other words, it can be considered as the branch of social science that deals with the production, distribution and consumption of goods and services, but the idea remains the same. Economists proceed by constructing the economic models; most of them have three elements: cost, scarcity and marginal analysis.
Economics holds its value because of the wide range of its application and utility. Most of the political problems that exist today have some economic aspect. It helps in taking decisions regarding the income distribution, profit sharing, eradication of poverty and unemployment (Duffy, 1993). It is essential for the organizations to do better business and consumers can use it to their own advantage, to make better buying and financial decisions.
The term “micro” means small and this highlights the fact that microeconomics is about the study of the market system on a small scale. It deals with the study of individual markets that make up the market system and concerns with the decisions and interactions made by the small economic units such as individual firms, individual consumers and individual government agencies in the market (Lipsey & Chrystal, 2007). It should be understood that both the micro and macro economics are interrelated as the microeconomic decisions that are taken are responsible for helping us understand the macroeconomic developments, but they address different issues and take very different approaches.
The decisions of individuals define a societys economic environment. Workers decide what jobs to take; consumers decide what goods to purchase in how much quantity and businesses take hiring decisions and watch their productivity. Microeconomics includes in itself all the factors that influence these choices. These decisions are determined by price and because of the price effect; microeconomics is also called as Price Theory. Economics is a tool that helps in evaluating the public policies; but never claims anything about the results being good or bad. Some terms that are related and are used in this evaluation are positive analysis, that is, the assessment of expected outcomes and normative analysis, which is value judgment and depends on the values of the person making the judgment (An Introduction to Microeconomics, n.d.).
Moreover, in analyzing markets in microeconomics, price is a factor that is considered. It always means the real or relative price of an item that depends on the changing value of money. There are certain assumptions made by Economists about buyers and sellers. First, they are considered to be goal-oriented, second, they are believed to be engaged in rational behavior and third, they confront scarce resources. Because of the scarcity of resources, certain choices need to be made, and choosing a single alternative involves opportunity cost.
Law of demand and Law of supply
Supply and demand are the basic concepts used in economics and we will look at the meaning of the terms first. Demand is the amount of a product that consumers are willing to buy at a given price and supply is the amount of goods that the producers are willing to supply at a given price. Price is the interplay between supply and demand and the relationship between the two affect the allocation of resources (Lipsey & Chrystal, 2007).
Law of demand
The law of demand intends to explain why the people spend their income in the way, they do. The relation of price to sales is known as law of demand and an inverse relationship exists between the two. The law states that demand varies inversely with price, so, if all other factors remain equal (ceteris paribus), the higher the price of a good or service, the less interested people are in buying it. This can be explained in this way that buyers do not prefer to buy a product at higher prices because as the prices increase, so does the opportunity cost of buying that good. If they buy that product, they need to give up on the consumption of something else valued by them. There are certain assumptions of the demand law that point the other factors that we consider remain constant such as consumers income and their tastes and preferences. The demand curve slopes downwards.
Law of supply
The law of supply states that there is a direct relationship between the price of a good and the quantity supplied. This means that if the price of a good increases, the quantity supplied will also increase and if the price decreases, the supply will also decrease. Here too, the ceteris paribus assumption is used as in the demand curve. Unlike the demand curve, the supply relationship shows an upward slope. This is easy for us to understand that producers supply more at higher prices because selling more when prices are high increases revenue (Lipsey & Chrystal, 2007). Also, it is notable that the supply relationship is a factor of time. It is so, because suppliers need to understand whether the price change that is caused will be temporary or permanent, before reacting to it.
Factors that lead to change in supply or change in demand
Peoples tastes and preferences can lead to change in demand and some other factors include changes in the income level, market size and expectations. An increase in the peoples income level and the increase in market size will lead to increase in the demand of most goods. Positive expectations about the nations prosperity will result in the increased demand of goods. Also, an increase in the price of a substitute good will mean an increase in the demand of the products related to it (OConnor, 2004). A decrease in the price of a complementary good will cause an increase in demand for the related good.
Those factors affecting the supply are prices of the resources, which are labor, land, capital and raw materials, technology,