Intermediate Microeconomics and its Application †MyAssignmenthelp

Question: Discuss about the Intermediate Microeconomics and its Application. Answer: Introduction Economics as a principle discipline has developed substantially over the years, with the development and dynamics of the global economy. The conceptual framework of economics, as a subject can be divided into two broad categories- the categories being microeconomics and macroeconomics. While macroeconomics specifically focusses on issues or phenomena which have effects on the economy of a region or a country as a whole, microeconomics is that genre of the subject which deals with the economic behaviour or phenomena related to one individual household or business entity (Baumol and Blinder 2015). Thus, in simpler words, macroeconomics is the study of a larger domain of economy and economic issues while microeconomics aims to explore the dynamics in the economic behaviour of the individual economic agents, both in the household as well as in the business sectors of an economy. Keeping this into consideration, it can thus be asserted that economics as a subject plays a key role in the economic decision makings as well as operational frameworks of the commercial institutions across the world. Over the years, with the increase in the dynamics of the global commercial scenario and with international phenomena like Globalisation and Liberalisation in most of the economies of the world, increasing numbers of businesses are going global (Gurgul and Lach 2014). The business operations are also becoming increasingly integrated, multilateral and complex, owing to the increasing inclusions of events and operations in the business frameworks. The competitiveness among the business organizations are also increasing owing to the increase in the supply side players and changes in the taste and preferences of the demand side players (Nicholson and Snyder 2014). In this context, it becomes immensely crucial for the commercial enterprises to emphasize on their decision making process and operational aspects such that their objectives of profit maximization and staying ahead of the competitors, thereby attaining sustainability in the long run are achieved. Taking this into account, the report tries to analyse and discuss about the different microeconomic principles and factors which have implications on the management of commercial organizations in the contemporary global economic scenario. Economics in Business Decision Making One of the primary problems which the businesses face in all parts of the world is the scarcity of resources which are required for the production of their goods and services. The problem of scarcity of resources is considered the most vital concern in the domain of microeconomics and also one of the primary assumptions in the subject (Krautkraemer 2012). Land resources- The land resources, in economics, not only consider land but also is inclusive of all the natural resources used for the production of goods and services, which include resources like water, natural gas, minerals, natural energy resources like oil, coal, forest resources and other raw materials, which are broadly required for the production of any commodity or service. These land resources are scarce and the producers using these resources pay prices in the form of rent (Frank and Cartwright 2013). Labour resource- This is considered to be the most vital resource used in the productive activities of any organization. Labour, in terms of economics, is the effort which people give in the production of goods and services of any organization. The price or income earned by the labour resources are known as wages (Sapsford 2013). Capital resources- In general, the non-human, manmade resources which are used for production of goods and services are categorised under the domain of capital resources in economics. These resources include the machineries, plants, tools as well as the financial resources which the suppliers use in producing the different goods and services. However, in the contemporary economic framework, the term human capital is coming into existence with increasing prominence (Hanushek 2013). The term, human capital, refers to the production augmenting skills present in specific human resources, mainly inclusive of the abstract capabilities of thinking and innovating which few people have. Thus, human capital is different from labour resources. The price of capital resources is paid in the form of interest. Entrepreneurship or Organization- This factor of production is the one which is required to combine and manage the other three factors of production efficiently such that the production and supply of goods and services helps the commercial organizations to earn profit. The profit earned by the businesses are generally considered to be the remuneration of the entrepreneurs. Keeping the fact that all the above-mentioned resources of production are limited, the primary concern of the business firms is to utilize these resources in such a way that the cost of production is minimized and the profit of the firm is maximized (Parker 2018). There are various microeconomic principles which affect the decisions and operational activities of the business organizations all over the world considerably. These factors and how they influence the firms and their management are elaborated as follows: The term Demand, in economics, refers to the willingness to buy goods and services by the customers, backed by their purchasing power at a given price level of the commodities or services concerned. The Law of Demand, in economic sense, states that there lies in general an inverse relationship between the price of the commodity or service which the consumer wants to buy and the demand of the same (Rios, McConnell and Brue 2013). The demand curve of a normal commodity, can thus, be shown as follows: As can be seen from the above figure, with the price of the concerned commodity falling from P1 to P2, the quantity of demand for same increases and vice versa, which makes the demand curve negatively sloped in general (Rutta and Thirtle 2014). The main reasons behind this negative relationship between the price of a commodity and the quantity demand of the same, which are known to be the income effect and the substitution effect, are described with the help of the following figure: As can be seen from the above figure, considering a two-commodity economy (the commodities being X and Y), the increase in the price of the commodity X, keeping the price of Y same, rotates the budget line from AB0 to AB1, which decreases the total demand for X. The reasons of these decrease are as follows: Income effect- When the price of X increases, the absolute income remaining the same, the relative income decreases due to the decreased purchasing power of the individuals, thereby reducing the demand for the commodity indirectly through the reduction in relative incomes of the consumers as can be seen from the compensated budget line (red dotted line) in the above figure. Here, due to the increase in the price of X, the relative income decreases, thereby decreasing the demand for X from X0 to X0, owing to the fall in income, which is known as the income effect (Duranton, Henderson and Strange 2015). Substitution effect- When the price of X increases, the consumers are more likely to shift from purchasing the same to its substitute products and purchasing more of other products. This can be seen from the above figure, where due to the increase in the price of X, the income factor remaining the same the demand for X decreases from X0 to X1 (Becker 2017). Thus, the total decrease in the quantity demanded of X can be shown as follows: X0X1 = X0X0 (Income Effect) + X0X1 (Substitution Effect) Exceptions of the law of demand The relationship between the price of a commodity and its demand is not always negative, especially in the case of exceptions like Giffen goods (commodities whose demand increases with increase in price and vice versa), Snob effects, commodities of addiction like drugs and absolute necessities like life-saving medicines. In these situations, the demand curve for the same is not negatively sloped (Kubler, Selden and Wei 2013). Thus, the above discussion shows that the nature of the commodity and the demand structure of the same play key roles in determining the operational framework and productive decisions as well as the pricing decisions of the same (Stanley and Doucouliagos 2012). If the demand for the commodities increase, the firms can increase their price as well as supply and vice versa, which can be seen from the following figure:From the above figure, it can be seen that with the increase in the demand for a commodity, the demand curve shifts to the right, which, provided the supply curve remains the same, increases the price of the product as well as the quantity of the same. There are several factors which may influence the demand for the commodities and services produced by a firm and therefore are of crucial importance for the firms operational activities. These factors are as follows: Income of the consumers- An increase in the income of consumers, in general leads to an increase in the overall demand in the economy, which in turn is expected to positively contribute to the demand structure faced by the firms (Friedman 2017). Price of the commodity- As discussed above there in general exists an inverse relation between the price of the commodity and its demand. This forces the firms to choose their pricings optimally so as to cover the cost as well as retain maximum number of customers. Price of related commodities- If the price of the substitutes increases then the demand for the products of the concerned company increases. On the other hand, the demand for the commodities sold by the company falls with an increase in the price of complementary commodities (Varian 2014). Future price expectations- If the consumers future price expectation about a commodity increase, then the current demand faced by the firm increases. Taste and preferences- The demand for the commodities sold by the firms are also subjected to the changes in the taste and the preferences of the consumers across different places and in different periods of time (Barreto 2013). In economics, the term Supply refers to the number of commodities or services which the producers tend to sell at various price levels. The supply of a product or a service, is in general positively related to the price of the same. Therefore, unlike the demand curve, the supply curve is in general positively sloped, which is shown as follows: Given that the demand curve of a commodity in general is negatively sloped and the supply curve is generally positively sloped, the equilibrium in the market occurs at the point where the demand and the supply of the same intersects with each other, which can be shown as follows: As can be seen from the above figure, it becomes crucial for the companies to adjust their supply of commodities or services on the basis of the demand situations in the market, such that the equilibrium is reached. Any anomaly in the demand-supply situation may lead to excess supply or excess demand in the market as can be shown in the following figure: There are several factors which contribute in the supply dynamics in the market, thereby becoming significant ones for the producers to take into consideration, which are as follows: Cost of inputs and raw materials- When the cost of the inputs of production decreases, the production process becomes more efficient as in the same cost, the producers can produce more of their commodities, which increases their supply. Technology- The technological innovations and progress also increases the cost effectiveness and efficiency in the production process of the firms, thereby affecting the supply positively (Bauer 2013). Government policies- The monetary as well as productive and infrastructural policies of the government and the tax and subsidy structures also have considerable implications on the production and supply of the commodities. Thus, taking these aspects into account, the business firms base their production and supply decisions such that they can cater to maximum number of customers and their profit as well as sustainability is maximised. Elasticity of Demand One of the key principles in the microeconomic theories, having considerable implications on the demand and supply of goods and services across the world, is the concept of elasticity of demand for a commodity or a service. The price elasticity of demand of a commodity or a service shows the degree of responsiveness of the demand for the same to a unit change in the price of the commodity or the service concerned (Buer 2016). The elasticity of demand can be divided into three categories, which are as follows: Own price elasticity of demand- This measure shows the change in the quantity demanded of a commodity due to a one-unit change in the price of the commodity itself. This is usually negative as with the increase in the price of the commodity the demand falls. Cross price elasticity of demand- The cross-price elasticity of demand shows the change in demand of a commodity due to the change in the price of the related commodities, both substitutes as well as complements. Income elasticity of demand- This shows the change in the demand for a commodity due to the change in the income of the same. The magnitude of elasticity also determines the demand supply dynamics in the market for a particular commodity and service. When the quantity demanded of a commodity changes significantly due to a small change in price then the demand for the commodity is said to be highly elastic (Babar et al. 2015). On the other hand, if a small change in price does not change the demand for the same significantly then the demand for the same is said to be comparatively inelastic, which can be shown as follows: As can be seen from the above figure, the same change in price can lead to a comparatively higher change in demand for those commodities whose demand is more elastic than those commodities whose demand is comparatively inelastic. Implications on business management As can be seen from the above discussion, for any pricing decisions to be taken by a firm, it is of immense important for the firm to consider the nature of commodities or services which the company is providing in the market and the elasticity of demand of the same. If the commodities sold by the concerned firm are inelastic in demand, then it is easier for the concerned firm to increase prices to some extent as the increase in price will not decrease the demand substantially. On the other hand, those companies selling products with high price elasticity of demand can decrease their price of the products by a nominal level and enjoy much higher demand for their products or services. One of the primary factors which affect the operations of any firm and the price and output decisions of the same is the type of market in which the firm or the industry operates. In microeconomic conceptual framework, the market structures, as found in real global scenarios, are divided into different into forms depending on the number of buyers and sellers present in the market, the types of commodities or services sold in the market, the barriers to entry and exit from the markets and the market power as well as the access to knowledge enjoyed by the buyers and the sellers in the market (Chen and Schwartz 2013). The different types of markets, as defined in the microeconomic framework are as follows: a) Perfect Competition- In this type of market structure, there are many buyers as well as many sellers, which in turn implies that that no buyer or seller enjoys more market power than others. There remains no barrier to entry and exit in this type of market structure and each of the buyers and the sellers are all price-takers and not price-makers. The products sold are also homogenous (Azevedo and Gottlieb 2017). b) Monopoly- This market structure is exactly opposite to that of the former. Here, there is one seller and many buyers, which gives the seller immense market power and makes him the price maker. The barriers in the market are also considerably high. c) Oligopoly- In this type of market structure, there remain many buyers and a few sellers. Each of the seller enjoys considerable market share and power and are dependent on one anothers decisions. There remain several entries and exit barriers in this form of market. The products are also differentiated (Fudenberg and Tirole 2013). d) Monopolistic Competition- This market structure has traits of both perfect competition as well as monopoly. There are many buyers and sellers in the market. However, the products sold each by seller is differentiated from one another. The firms base their production and pricing decisions on the types of markets in which they venture and for the operations of a firm to be robust, a detailed analysis of the market in which they operate and the traits and level of competitiveness are to be considered by the producers in order to make their venture profitable and sustainable (Mahoney and Weyl 2017). Conclusion As can be seen from the above discussion, the microeconomic factors and principles are not only theoretical concepts but have considerable implications on the business scenario across the globe. 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