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The Basics Of Microeconomics Essay

1063 words - 5 pages

The Basics of Microeconomics

Economics dictate every aspect of our lives in the free market world. It is an interesting topic that very few people truly understand. There are two major fields of economics; microeconomics and macroeconomics. It is not always possible to make a distinction between microeconomics and macroeconomics. For example, the difference between conflicting schools of thought in macroeconomics is sometimes traced to differences in assumptions related to microeconomics. Microeconomics, explains how the interplay of supply and demand in competitive markets creates a multitude of individual prices, wage rates, profit margins, and rental changes. ...view middle of the document...

This falls into what is called diminishing marginal utility. Diminishing marginal utility means that successive units of the same good are worth less to the consumer, negating the need for more than a required amount. So an important factor in determining supply is also assessing the demand. Determining supply is a predictive process that must be monitored very closely; it is also referred to as production function. Production function is merely the correlation between demand theory and estimating consumer habits.
Demand is the quantity of the good that the consumer wants to buy, and just as importantly, what the consumer has the ability to purchase. If the price of the product is more than the consumer’s purchasing power, the market equilibrium will not be achieved. In that case the price must be adjusted so that the purchaser will still buy, and the manufacturer will continue to profit. Another factor to consider when determining the demand for your product is the availability of substitutes. If there is an abundance of substitutes you must carefully examine the market to see if the demand exists for you to even enter the market. If you are already in the market you must review current market prices, your current revenue, and projected revenue while determining how much your product output will be. Just because there is a demand does not equate to positive growth for your company, if you produce a product that costs more to build than it sells for your product will flood the market resulting in a decrease in the demand. An exception to this rule is a monopoly. A monopolistic company has the power to control supply and demand to a much greater degree than a competitive firm. It is for that very reason the Federal Government has emplaced laws making monopolistic firms very hard, almost impossible, to operate.
Of the three basic components most people have a basic understanding of supply and demand, but most do not know what market equilibrium is. This is by far the most important aspect. If this cannot be determined, then the supply will not meet the demand, or the opposite, supply will be greater than demand. Market equilibrium is the point at which the consumer...

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