Economics is an important part of social science that basically deals with analysis and prediction of production, consumption as well as description. Economics is divided into two parts – Microeconomics and Macroeconomics. The problems for economic condition can be there with an individual person or a group. The study of Microeconomics is important as it explains a lot for different economic problems. This branch tells us about the economic problems related with each individual unit as a single company, workers, firms, consumer and investor. This branch explains that how this part is important for all people and how consumers are able to take proper decision.
It means this part explains about why as well as how microeconomics takes various decisions. Suppose consumers select some particular products, but their choice changes with an increased price of the product. It means the reaction of consumers related to any product is very important as it also affects the market. Now, it is clear that consumers are also an important part of economics. In the same way a firm can make decision that how many workers will work in a firm and after that how these workers will decide that how to complete a provided work. Here, this part of economics or microeconomics explains that how each unit is significant.
What do you mean by a larger unit?
Though each part is important, but when these units come together, then microeconomics get a larger unit. A good market can form a larger unit. You can easily get that the automobile companies produce lots and lots of automobiles, because they adopt the way just according to fulfill the need of consumers. It is really important to know that in the American market consumers and producers both interact. In addition, the interaction helps in pricing the automobiles. The various companies start investing in new companies to produce new cars. The study of Microeconomics indicates that how individual firm can influence a market and how each firm and its value become different than other firms. Not only that, but how these firms get affected by the government rules? How the different small firms as well as the industries get affected by condition of global economics?
How Microeconomics is related with Macroeconomics?
Macroeconomics is the branch of study that deals with the national output or the quantity of aggregate economy such as inflation, national output, interest rate and unemployment. Though, both parts are different than each other, however in these days they come close to each other and become less distinct. This is because the markets in national level also need to analyze. This may include an exact aggregate market for the various services or goods as well as labor. The corporate bonds are also important.
So, if it becomes important to comprehend the nature or the extent of aggregate markets, then it is very important to understand the behavior of each firm, investor, worker, and also the consumer. They just constituent these aggregate markets. Now, it is completely clear that how microeconomics is prominent to understand the value of a macroeconomics. In case a firm shuts down or closes and a number of employees become unemployment, then this will influence the economy rate at the national level and not only that, but in case 3-4 companies get locked, then it will be a great problem for the whole country as not only the rate of unemployment will be increased, but it will also influence the economic condition or the financial position of a country.
So, it is completely clear that directly or indirectly, microeconomics is a part of macroeconomics and depends on this. Thus, they are related to each other. Though microeconomics as a subject is primarily focused on each unit part or individual person or firm, but it is also a part of Macroeconomics.
1.1 What are the Themes of Microeconomics?
Microeconomics is the study of production and consumption, but it has a direct connection with the limits. It means people spend on products or services when their income is a limited income. There are the exact limitations that a firm generates the products and also give a proper limitation of time for the workers in the daily basis and for the weekly basis. So, what would be the limited period of leisure or labor is important. On the basis of that limitation a person can use his remaining time of the day or a firm can pay for the over time or for the extra time to produce more objects.
Not only for the exact limitation, but it is also about the resources and better to say about the scarce resources. What is the way to make the limits? With the help of microeconomics you can easily know about this. Microeconomics explains how a person can use his time and time of labor must be replaced by the time of leisure. The limitation of leisure will be decreased and the limitation of allocated time to work will increase. At the same thing can be implemented in case of the different product generation by a company or firm. So, extra time for doing work is provided, however, it is the choice of a firm that how it produces its products and what would be the right quantity it needs. One more prominent thing about the production is the exact comparison of hiring more workers with the new machineries versus increasing time to work on the off days with extra money.
As the study of microeconomics is important for all and even the plans are developed to acquire the proper result, so people have to think twice before taking an exact decision. To lower the burden of various firms, there are some rules and these are generated by the government and they always maintain that particular rules to get the proper development of a country. Firms know or get proper advice of how much is required to produce. In addition, it is also important for them to arrange work in a proper way and on the basis of that the workers get the flexibility of their selection of work or jobs. Along with that the selection of time or hours suitable for them and they also select where to live. Here, the choices are perfect, but limited and thus you can easily get that how limitation is an important factor in Microeconomics.
Microeconomics facilitates people in such a way that they have the choice when they take decision of allocating the various scarce resources. The study of Microeconomics also deals with the tradeoff products and indicates that how this trade-offs products are best made. The firms, workers and consumers, producers and workers are important factors through which it will be clear that how important the factors are. Only after knowing properly about these factors anyone can easily understand that how the scared sources are valuable. Let us know in details about these factors as follows –
Prices and Market
Price is an important part or element of microeconomics. The requirement of tradeoffs is always faced by the workers, firms and consumers and all their need depends on the price. The trade-offs like consumers, productions and firms all depend on the price.
Theories and Models
In Economics, analyses are important, which is completely based on the observed phenomena. Various theories are followed to give a certain solution for a certain condition in different science subjects as Physics, Mathematics and Chemistry. In the same manner, it is significant to know about some theories in Economics. So, the different theories are predicted by some experts. In case the cost of raw material increases to acquire the good productivity, then a company or an industry needs to hire workers. The changed price of the raw materials has a prime motto of increasing number of its products. Now, what is the role of a theory for this? Microeconomics is important for an individual firm and the theories of microeconomics indicate that how an individual person or things can manage everything in a proper way. So, It is very important for a firm or the management to understand that how payment of workers, working hours of labors and production of an industries are required to handle in a proper way.
Marketing Prediction is another important step and it can easily give a proper solution to the different firms. Thus it is known as theory of firms and this is a complete set of some rules as well as assumptions. It means in microeconomics prediction as well as explanations are established on theories. Here, prices for inputs as well as outputs are important as on the basis of input price along with charges, wages, raw materials, the output price is assumed. So, the theories are followed to acquire a completely suitable output to have a perfect margin.
Prediction is also an important motto for the theories. This is the prime reason that a firm can easily get that output will be suitable according to its input or not. It means after increasing in rate of raw materials an exact prediction is also important and with the help of theories based on econometric techniques and statistical assumption the different models are constructed. Now, it is perfect to have quantitative predictions with the help of these models.
How Prices are determined?
In case of planned economy the prices are fixed up by the government and people need to adopt that exact price. On the contrary to get market price, some important points need to be noted and these are interaction of firms, consumers and also the workers. So, how the price is assumed? Undoubtedly, the collection of sellers as well as the collection for the buyers altogether fixed the price. Market is also important after this and thus, a demand of a product that needs latest technology or more features can be released in the market and the price is determined according to the suitable market.
Now, it is clear that price in a market must be suitable for every consumer. All factors must satisfy to a seller as well as a consumer.
What is a model?
A Model is basically the most accurate way to explain the economical theory based on the different mathematical expressions. This model is based on the theory related to the market, firm or any other entity. If anyone desires to understand this with a model in a proper way, then he must consider an exact case. To predict a model, then it will be easier to understand the case. For example how much a company acquires its output level or change in that level after any changed in the price, suppose, after dropping of the price of raw material up to 10 percent.
When a model is predicted in this way for a firm, then along with the suitable theory of microeconomics, econometrics and statistics also measure the complete accuracy. Quantifying is as important as predicting itself. If the prediction indicates that dropping of 10 percent gives an increment or profit of 5 percent, then this model will provided the exact outcome as it is 5% or any particular range between 3-7 percent.
How predicting theory is important?
Relating a particular theory with a phenomena is always important because a theory or the law is completely based on some set of events and thus tests are done and observations based on these tests tell that the theory is perfect to some particular conditions or set of phenomena or not. So, the success of a theory and its usefulness predict this. However, after testing and observing the theories may be modified and then applied to the new set of events. Now, it is also observed that when a theory is unable to express the things, then it gets discarded.
The theories or laws predicted must be invariably imperfect. This requirement is always there with each successful law. If we consider the theories of Physics or chemistry, you cannot say that these subjects do not follow invariability. In Physics, Boyle’s Law is there to describe about the behavior of gas molecules when temperature is kept constant and volume as well as pressure works for it. The law explains that individual gas molecules and their behavior like elastic billiard ball in certain conditions.
However, the molecules at any given point of time treat like billiard balls and the change in temperature can be there with change in pressure and volume. Now, scientists get a positive direction and use this tool in different ways. In case you take another example of theory of Chemistry suppose Mendeleev’s periodic table, then you will get that the rules were perfect to certain period, but they became fail just after evaluation of the other elements. But, this has been modified with the modern periodic table.
In the field of Economics, the laws are also limited and thus when the firm’s theory is applied, then it is always considered that how much input is there to acquire the exact output according to that. However, it is also true that each time or each firm is not always planning for the more and more production and thus it is limited in microeconomics that the managers need to maintain a budget just within a limited capital and other related factors. So, the theories also know about the proper investment decision and the suitable timing for that. So, growth, behavior and evolution are known properly. It is also said that how theory and models are perfect for policymakers and for the managers.
Positive versus Normative Analysis
Microeconomics deals with nominative and Positive analysis. Let us understand the terms as well as the importance one by one.
At the moment when prediction is made with proper explanation, then it becomes very important to understand that what should be there for the consumers or for the workers as well as for the firms. It means positive analysis deals with the effect and the cause. This is chief or the central of the requirement of the Microeconomics. It can easily be explained with an appropriate example. In case the government of a country declares about a quota for importing the cars from any particular foreign company, then what would be the impact of this on the market of car? What would be the exact effect on the consumers? How the impact would be there for workers? Now, the prime question before these all is about what would be about the production of the car. Not only that, the price of the imported car will also affect the market.
Theories are generated or developed to explained perfect phenomena. In addition, the observations are very important and they are tested to understand that the theories can be applied to that or not. On the basis of these analyses, the models are constructed and the exact predictions are made. To understand this, it is better to understand the various concepts.
Suppose the tax gets raised for the gasoline by the government and then it can easily be imagined that how the market response will be. It means the tourist department, cost of cars, automobile companies as well as the producers of the parts all need to accept that change in the market. The consumers and all just estimate or plan for the perfect impact in their business. All government policymakers also need to know about the quantitative estimation related to the impact. The policymakers determine the cost carry out on consumers, the impact on profit and employment relevant to oil department, tourist industries, automobile and the tax revenue section which is need to collect every year.
At this condition when policymakers and consumers along with the other factors go beyond prediction and explanation, then the most prominent questions come in mind and this is “What is the best?” Now, this question is very important for the managers as well as the policymakers where each one would like to understand the condition and this is the situation that requires Normative Analysis. Automobile companies always think of getting profit by selling the giant and small vehicles. For the automobile sectors it becomes very important to make the cars more and more fuel efficient. Tax is there by mean of public interest and this is the prime issue of the policymakers. Sometimes the objectives of the policy can be acquired from different kinds of taxes that could be cheaper. It means there must be an option of any other policymaker. This is the exact mean of normative analysis that would be better choice for all.
It is always said that normative policy is also about the policy choices along with any alternative method. In case of desirable tax it is also important to know about the tax size, which is optimal. Value judgment is also significant for normative analysis. At the time when two different types are there and you need to have a proper comparison and society must take a perfect value judgment. In addition economic efficiency is compared with weighing equity. At that time macroeconomics will not be able to say that which policy would be profitable.
1.2 What is Market?
What do you mean by “Market”? In Economics “Market” means an interaction between the sellers and the buyers with their complete potential. People need to understand it in a better way as most of them are confused with this term and indicate this to a particular section as oil market, bond market, housing market, labor market and also the market where they get proper product and services. Now, in terms of economics, Market means the central focus for observing and also for analyzing. This is an important reason that economist describes this term market in a distinctive way. Now, it is completely perfect to understand what market means and there are two important factors of economic unit those come under this. These are –
Now, it is an exact or a complete meaning of market as when the sellers and the buyers are there with potential or their actual interactions. In addition, the market also determines an appropriate value or price of products or services.
Difference between industry and the market
It is important to know that market means complete area where different products and services of various firms are purchased or sold. An industry is a part of market or better to say a supply side for a market.
An industry means gathering of numerous companies where products are completely similar or thoroughly connected produces. When it is related to computer, then there are various companies or firms as HP, Dell, Lenovo and many other firms and these firms supply this product in the market. These companies are sellers, and the buyers are the various consumers for their household purposes.
Value of potential interaction in the market
Definition of market is very important for an economist and thus, it is also important to predict that which sellers and buyers come in contact to form a particular market. The Potential interaction means an actual way to come in contact. To grab this with a proper explanation, you can say that a person from a place go to some nearby place to purchase gold. Though the motto is not of purchasing the gold only, but it may happen that if a purchaser gets the quality material from any other market, he usually buys. However, an interaction of a person is always with the market of his native place, but he can purchase the things from any other place if he likes to purchase.
Now, in case of lower price or affordable carrying charge a person can purchase the thing. It means if Mr. John a New Yorker can purchase gold from Zurich as the charges he found is minimal. Here, arbitrage can be there if the difference in price is somehow significant means lower. So, arbitrage is always potential as a person can purchase the gold or the products at lower price from one place and sell them into higher price at any other place. This can be said as world market for gold. Here, one term is very important to understand for them and this is none other than interaction or potential interactions.
So, it is clear that market means the focus on the work related to economy and this is the reason that economics also deals with functioning of market and thus it becomes important to know about why there is a lot of competition in the market. In addition, it is also observed that different products are available in the different prices, but there are a few products which always show a complete competition. There are several firms, but a few firms are competitor. It can also be noticed that only a few are very popular as compared to the others. Some prices in the market are extremely higher than the other market.
Competitive versus Noncompetitive Markets
Behavior of market can be divided as two different ways – Competitive market and noncompetitive market. These can be explained as follows –
Sometimes a few sellers or producers also affect the market and make it as a competitive market. You may have notice that in airline firms all routes are not served by them and the most of the routes are facilitated only by a few firms. So, there is the situation of a competitive market.
Market always needs a perfect price of a product to sell to the customers. Markets provide the exact possibility for the buyers to buy and for the sellers to sell the distinct products and services. Basically, the market price of a market is prevailed. In an inexpensive market some products, which are perfect for the competitive market, can be seen daily through newspaper or through other sources. Some products like gold, corns, wheat etc can be seen daily in the business page of the newspaper and this is the prime reason that an idea of this can be get easily. However, sometimes one seller keeps the value of a product slightly higher or lower than other sellers. This happens only to get stability in this competitive market.
Genuinely, the market prices differ for the similar product to get more and more customers. The brand of a product also matters as there are many firms whose brand name is important for the customers to have a reliable product. So, at this stage the product of normal firms lose some customers. However, in this competitive market each product is availed in the same or a bit different market price, however, the people just go through the average of this and purchase according to their budget.
The market price of the goods fluctuates. However, some fluctuates rapidly. For the competitive market it is very true to have the rapid fluctuation. If you consider the stock market, then you will get that how competitive this is. The reason is many buyers and sellers are there. In a stock market the price fluctuates minute to minute. You can get a perfect difference between a high and low price in a stock. You can also get that costs of several commodities like gold, soya bean, wheat, lumber and silver can fall or rise in a week or even in a single day.
Market Definition— The Extent of a Market
Market definition tells us about the interaction between the buyers and sellers. Now, an expert always desires to know which sellers and buyers are needed to comprise in a particular market. To understand this; the most important thing to know is boundaries of a market. So, what do you mean by it? This indicates, that a range of a product and also need to know about its boundaries geographically.
In case of any product is there, suppose gasoline, then it is important to clear to have its proper supply to the area. This is known as geographic boundaries. Another factor is the range of product and it must be suitable for the consumers. Sometimes high-octane premium is also available in the identical industry where there is an exact availability of regular octane. Another example can also clear this motto of extent to a market related to its limited boundaries. Suppose, a person desires to purchase a home and he needs to purchase at his work place. So, it is very important that he must have an exact need to get a home in a particular geographic area. So, this is the exact boundary for them. Undoubtedly a person will not go to purchase a home which is availed 200 miles away.
In this way, extent of the market is also there and sometimes the shipping service from a particular area becomes high due to availability from a long distance and thus the price and market from one factor to the other gets affected. It means the market gets changed in terms of gasoline for more than two different areas. One more thing is arbitrage can be there in case a person purchases anything, gold, from one market at a cheaper rate and sells in some other market. So, marginal price or the world market of gold is also there and this is the difference from one market to the other market.
Now, the extent of produces is also an important factor to understand the extent of the limit. If there is a great competition between the two or more brands related to a product, suppose SLR Camera, then it is always true that the same brand or the same market cannot be a part of some other products as “Photo-and-shoot” digital camera. This is because only because they are used in for some other purposes. Product range in the similar market can also be seen easily as we just discussed about the gasoline market, where regular product is availed in the same place where the premium product is sold.
Now, on the basis of these facts, the market definition is crucial and the different reasons of the definition are –
1.3 Real Versus Nominal prices
Prices of products vary from time to time. We often say that the price of a product was relatively lower before 10 years and it will increase or may be doubled just within coming 10 years. So, this is important to know about a general level of price. Correction of inflation in price is important for comparing the different prices. It means it is significant to measure price in real terms rather than its nominal terms.
What is a nominal price? The nominal price of goods means an absolute price and it is sometimes known as “current dollars”. Suppose the insignificant value of a product was 0.89$ in 1980, $, 1.27 in 1990, $ 2.00 in 2000 and $ 2.50 in 2010. So, these are the exact prices of a product in the super market in these years. Another important term is a real price for a good and this is also known as the “Constant dollar”.
Aggregate measure is important for consumer’s point of view and thus they need to go through CPI as Consumer Price Index. This is calculated by measuring or getting the retail prices. This is published monthly and all calculations are done by ‘US Bureau of labor Statistics’. The main aim of this is to keep record of purchasing the products by the customers. The record deals with a motto of how goods are bought by “typical” consumers to change in time. Inflammation in the economy is based in this change in cost with time and this is obtained by change in percentage in the CPI.
Many times the people get interested in raw materials of the products and other products used by the firms. In addition, this also becomes interesting to know that which products are sold to the retail store at wholesale. Here, the measurement of prices made in the form of producer prices. Thus, the aggregates are there to know about the PPI or Producer Price Index. This is also generated by the same department and in the same way as the consumers Price Index and the percentage change is an important factor. This indicates that how the price of wholesale is changed in a proper time. Now, on the basis of PPI changes in terms of percentage, the value of CPI is predicted for its future use.
Now, the question arises here is “What to convert from the nominal value to the real Value”. The answer is completely relying on the form of surveying or examining. So, if the service or the product is there for consumers, then undoubtedly it would be CPI and in case of the examining of product by a business, then this must be known by PPI.
Now, how to find out the CPI? Suppose we desire to find that in the case of butter, then the formula used
Real price of butter in 1980 = CPI1970 /CPI1980 *nominal price in 1980
Now, you should put the value against this formula to get its exact outcome. When questions are provided in a proper way with the provided value, then you just need to keep in mind the year which would be the target.
1.4 Why we should study the value of Microeconomics?
Microeconomics is the branch of economics that deals with the various conditions of market and we all are related with it. We all mean the producers, consumers and workers. Moreover, by applying the principles of Microeconomics we are able to understand the various assumptions and the way of getting it. The study is very important and the exact definition is important not only for the producer as well as an economist, but it is very important for people or the consumers. To understand in a better way here we have two different examples-
Corporate Decision Making: The Toyota Prius
Toyota is one of the most know company for automobiles introduced the best featured car first time in the world, known as Prius. The manufacture company started this project in 2007 and start providing this to the worldwide by 2001. The importance of this became popular as it is the initial hybrid car for the people in the world. This ran successfully on gasoline as well as in a battery. So, this became very popular within a few days as this type of cars is energy efficient as compared to the normal car. Its speed was 45 miles to 55 miles in a gallon. Now, after knowing the properties as well as popularity all other manufacturers also start working on it and generating an excellent hybrid car in the market.
Who were involved in this? There are many people who contribute in launching a new vehicle and in case of Toyota too. Now, what are important questions for a company while considering about a product? Let us know in case of Toyota as what were they faced? The company had to think –
After understating the trade-offs as well as predicting demand and consumer’s reference, the manufacturer or Toyota decided a perfect value.
Now, when this company started manufacturing the same brand and car in the US, then concern became important to know the various factors of this country. How much production cost would be in the US? What would be the charge of raw material, labor charge? Not only that by how fast this production will get its target? Now, the important thing would be the right cost of a car. The exact cost of a car was determined by the complete cost of production in a year. What was the total number of cars producing cars in a complete year? How fast the experience of workers as well as managers would be there? This is an important factor to know about how fast the production of cars would be.
The next important point for the company Toyota is for its competitors as pricing matters a lot. How to differentiate in price was also important by adding some important features. Some other properties were important here as leather seat, or an attractive inner portion. Would the company get its profit margin by making the item as “standard” items? So, there are many questions which were important for all and basically for the Company Toyota.
What would be if the other companies take the same features in their new cars? What would be if Nissan also launched the same car at a lower price? The profit margin of Toyota would be perfect after that or not.
There were some risks of increasing price or decreasing demand and the most important reason of this was increasing price of gasoline. Uncertainty was also there with wages and there were important factors because the required output was important for the company. The company always understood the fact that the cost should not be extremely high even though the parts and engines were made in different places and only assemble of finished car was done to release it in the market. So, rewarding to the different divisions was also important for the company.
In addition, proper relationship with the US government was important to get a good business as well as a good profit. Another important thing was the policy or better to say regulatory policy. The safety regulation and health were important to comply. This was the prime requirement of the company from the US production line company.
This is a completely genuine fact and not only in case of Toyota, but others also face the same question when manufacture a new product in a foreign country.
Public Policy Design: Fuel Efficiency Standards for the 21st Century
Public Policy design is an important part of Microeconomics and this is also significant for a country. The US government started doing a great job in 1975 and this was the declaration to impose to acquire the proper design for developing the normal fuel Economy. This was done in 1975. So, the light trucks as well as cars, those sold domestically, now required having proper feature of this. Sports Utility vehicles and vans also came in this list to make it perfect as per the declaration of the government.
An important part in the US known as CAFE or Corporate Average Fuel Economy worked hard on this matter. In 2007, George W bush, the US President, in the act of Law of independence and Security. In this the announcement was made for the automakers to boost the fleet of gas mileage as 35 mpg or miles per gallon. This was declared till the year 2020. However, the next president Obama pushed the same thing up to 2016 and then made the things for boosting up to 55 mpg for 2020. This was a nice declaration with 13 companies. So, the average fuel economy means a perfect energy security. This also depends on oil imported for the consumers of the country. Environmental benefits are very important for substantial manner and thus decrease in greenhouse gas-emission and it is an important matter.
A lot of suitable decisions are taken in case of oil efficiency program. In addition, all these decisions are important in the economic point of view. The prime and the first important thing is impact of programs on the consumer. This prime thing is evaluated by the government first. Before Imposing CAFE, it is very important to know some other perfect and effective points. The first thing is estimating cost of cars and other vehicles or light trucks which need to be produced. Now, producing cars and trucks must have a suitable price. So, how to reduce cost? Various automobile companies might do this just by using some light materials for the body parts. In other ways the footprint can be changed. After this, the government knows that how the new cost of production after certain changes will mark the making level as well as the cost of new products. How to maintain this additional cost? Will it be perfect to pass this additional cost to the consumers by adding some extra charges? What would be perfect? Is it perfect to absorb by the manufacturer.
One more important phase related to the oil consumption for which the government must ask to the manufacturers that why the market-oriented companies get failed to solve the problems of oil consumption. The price of oil can be determined by the cartel and this is important to push the oil price beyond the competitive level. However, the political along with the security issues are always with that. At the moment when high demand by the country makes an outflow of money or dollars to those who are oil producers. Moreover, the problems go beyond economic confinements. So, what is the prime role of Economics is? This will give you the right idea and right knowledge to lower the dependency on the foreign oil. So, public policy decision making is also an important part of Microeconomics.
Links of Next Microeconomics Topics:-