MICROECONOMICS

Microeconomics is a branch of economics that analyses the conduct of firms and individuals in decision making related to deficient resource allocation and also the interaction between them. The fundamental principle of Microeconomics is based on the law of supply and demand.

Microeconomics is a discipline of economics that studies the behaviour of individuals and firms in making decisions regarding the allocations of scarce resources and the interaction among these individuals and firms.

It generally applies to the market for goods and services and deals with individuals and economic issues.

• Elements of microeconomics
• Demand-supply and equilibrium
• Measurement of elasticity
• Consumer demand theory
• Theory of production
• Costs of production
• Market structure
• Perfect competition.

Demand, supply and equilibrium

a)    The equilibrium cost is the cost at which the quantity demanded equals the quantity supplied. It is determined by the intersection of the demand and supply curves. A shortage exists if the quantity of an excellent or service demanded exceeds the amount supplied at the current cost it causes upward pressure on price.

b)    Supply and demand: The result of the interaction between consumers and producers in a competitive market that determines supply and demand equilibrium, price and quantity market forces tends to drop the price if the quantity demanded and price rises if the amount requested exceeds quantity supplied.

Measurement of elasticity

a)    Applies to the extent to which the quantity supplied of a commodity changes following the amendment in one of the factors that determines supply.

Types of elasticity

• Price elasticity of supply
• Cross elasticity of supply
• Arc elasticity of supply
• Point elasticity of supply

Price elasticity of supply: This is the degree of responsiveness of the quantity supplied to changes in the price of the commodity.

Factors affecting price elasticity:

• The durability of the product: Durable products can be stored hence supply can be varied as the price changes. They have elastic supply while perishable products have an inelastic supply.
• Gestation period: Goods that take longer time to mature will have an inelastic supply while those that develop will have an elastic supply.
• The existence of excess capacity: If the firm's facilities are not fully employed, increases in the price will lead to increase in output.
• Institutional factors: where the supply of the commodities is governed by the policies, such as quotas the elasticity of supply will be low.
• The existence of goods in stock: where the product is held in the stock. The change in price will attract more supply, and this leads to elasticity in supply.

Importance of the concept of elasticity of supply:

• Used in the determination of pricing policy
• Used in formulating government policy
• Used in formulating imports and exports policy
• Used in formulating consumption policy

• Arc Elasticity

This is the coefficient of price elasticity between two points on a demand curve.

• Point Elasticity

Refers to the price elasticity at a point on the demand curve.

Theory of a firm

• A firm is a business enterprise which buys and sells goods and services to the customers having objective to make profit.
• Industry refers to a group or family of firms that produce similar goods or services, for instance transport industry which include all vehicles.

Cost of production

Cost of production is the payment made to factors of production:

• Total cost
• Average cost
• Marginal cost

• Total cost: They are costs incurred in the process of production. It's the sum of variable costs and total costs.
• Fixed costs: The costs which do not change with a change in output. It is associated with fixed factors of production and includes rent rates, interest on loans, insurance and depreciation.
• Average costs: These are costs incurred in the production of a single unit output.
• Marginal cost: These are costs incurred in the production of an extra unit of output.

Perfect competition

This is where there is stiff competition in the market whereby the sellers have quality goods which are in demand.

Benefits of microeconomics

• Useful in the efficient employment of resources: It is helpful in the efficient employment of limited, scarce resources of a country. It explains the condition of efficiency in both production and consumption, which is essential in economics and highlights the components which are responsible for the departure.
• Understanding free enterprise economy: It is of great importance in understanding the working of a free enterprise economy without any central control.
• Helpful in the development of international trade; microeconomics is also beneficial in the progress of international trade. It is used to describe the gains from international trade, the balance of payment disequilibrium and the determination of foreign exchange rate.
• Helpful in understanding the implications of taxation; it's also useful in comprehending the significance of taxation, it supports in explaining as to whether an income tax is of worth.
• Offers the basis for Welfare Economics; the entire structure of Welfare Economics has been built on price theory which is the fundamental part of microeconomics. It shows how relative prices of various products and factors are formed. These conditions can be of great help in raising the standard of living of the population.
• Provides tools for evaluating Economic policies of the state; microeconomics theory describes the condition of efficiency in consumption and production and stresses on the components which are responsible for departure from ability. In this microeconomics suggests suitable Economic policies to promote Economic efficiency and welfare of the people. It also helps the state in formulating correct price policies and evaluating them in proper perspective.

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