Microeconomics Market Equilibrium Analysis

Science is a broad field that has been researched and studied for many centuries and with the rapid growth, development and improvement of the Internet Communication Technology (ICT) sector and infrastructure, the future of science looks bright. There are however three main branches of science that are mostly studied on; natural, formal and social science. It is the last branch of science (social science) that I am going to focus on. Social science deals with the natural day to day activities of the human life. It is the type of science that places more emphasis on the different experimental and scientific methods that are easy to analyze and interpret in relation to a specific topic under study.

Under the social science umbrella, some of the main topics that are studied in the modern science world are anthropology which is the study of human behavior and human history; others are education, geography, law, psychology, sociology, communication and development studies, information science and economics. The focus of my letter that will be addressed to international professionals will focus on economics as a branch of social science; the letter will critically discuss and explain the difference between the main branches of economics; microeconomics and macroeconomics. The letter will however briefly look at another branch of economics; scarcity. As an economists, I have been in several situations that involve either microeconomics or macroeconomics, I will, however, give relevant examples of microeconomic and macroeconomic decisions that I have made as a profession, factors that propelled me to making the decision(s) and the impact the decision(s) had on my personal life as well as to the life of other people that I interact with on a day to day basis.

The Difference between Microeconomics and Macroeconomics

The two major branches of economics that are mainly studied are microeconomics and macroeconomics; however, there is another “minor” branch that is also discussed once in a while; scarcity. In economics, scarcity refers to the situation where there is tension or conflict between the limited resources and the unlimited needs. As an economist, an individual scarcity that someone may face may include, limited time, finances and skills to satisfy a particular need, whereas for a nation scarcity can be in the form limited or lack of natural resources, limited technology in various economic sectors and limited human and financial capital. This scarcity may hinder the rapid growth and development of an individual or a nation in general. The main focus is however on the microeconomics and macroeconomics.

Macroeconomics

Whereas microeconomics focuses on individual, small and medium entrepreneurs, macroeconomics goes a step further and deals with a nation’s economy and the different sectors that greatly contribute to the nation’s economic growth, development and stability. For instance some of the sectors that are studied in macroeconomics are agriculture, industrial development among others. It is however important to note that not all nation’s depend on same sectors for their economic growth and development. The main purpose of macroeconomics is to fast track the nation’s economic growth and development, increase the employment rate and wages / salaries for employees and casual workers. Another aim of macroeconomics is to control prices of basic commodities and services and reduce or eliminate inflation. As an economist, it is important to note that we (economist) play more pivotal role in macroeconomics than in microeconomics, in macroeconomics, we are mandated with the responsibility of helping in solving disputes related o unequal wages among employees, monitor population growth, analyze the causes of rural – urban migration and increase in criminal activities. Apart from economists playing a pivotal role in macroeconomics, the role of the government cannot be overlooked, the government implements three basic policies that are used to influence macroeconomics, these are fiscal, monetary and growth policies. Macroeconomics involves all players in the business community, each of them plays and a specific role in the growth and development of a nation, the major players are firms (that deal with production of goods and services), the government, the consumers and the rest of the world.

Microeconomics and Macroeconomics Phenomenon

As an economist, I have had different situations that I had to make tough microeconomics and macroeconomics decision depending on the various factors. The global economic crisis that affected Europe, America and most of Africa from 2007 is the time that as an economist I had to make tough decisions. When it came to microeconomics, I had to adjust my personal and financial budget because of the recession of the time. This meant that I had to forgo some of the basic commodities that I was used to having.

It is during the same period (during the economic crisis) that as an economist and entrepreneur I was faced with tough decision. The high cost of production of goods and services forced me to lay off some of my employees since I was not in a position to cater for their wages. It was only by so doing that I was able to meet the high cost of raw materials and other costs. This negatively affected them and their families but for the company to remain relevant and competitive, that was the decision I could make as an economist and entrepreneur.

Microeconomics

To my understanding as an economist, microeconomics specifically deals with how individuals, both consumers, and entrepreneurs make personal decisions in relation to financial planning, budgeting, and spending. It focuses on the supply and demand factors and how they affect the prices of goods, services and how this, in turn, affects the economic growth and development. Microeconomics as a branch of economics has three sub-branches under it, even though they are rarely discussed and they are; comparative micro-statistics, micro-statics and micro dynamics. The importance of microeconomics in the business cannot be under estimated since the success of this segment of economics will determine the success of macroeconomics. For the time I have been an economist, both professionally and as an “amateur”, some of the importance’s of microeconomics I have observed are; helps to understand the working of the economy of the business as well as the nation, it is helpful in the well-organized utilization employment of resources, it helps entrepreneurs in International Trade. In addition to that, microeconomics helps individuals to understand the importance of individual and business taxation processes and, finally  it helps in evaluating different economic policies and also explains the conditions of efficiency in demand and supply

Microeconomics and macroeconomics can determine the economic growth and prosperity of the nation. This paper has critically looked at the difference between the two and it has also given the function of both the macroeconomics and microeconomics to the growth of the economy. The paper has closed by giving relevant examples of situations that are related to the two main branches of economy and the situation that forced me as an economist to make. It is also important to note that, the paper briefly mentioned the third branch of economics known as scarcity.

Microeconomics allows comprehending the basic laws and underlying assumptions that are observed at the micro-level, i.e. when individual economic agents interact with each other at the local markets. This paper summarizes and analyses the video Changes in Market Equilibrium (Khan Academy, 2012). In general, these economic laws are universal and can be applied to different situations including real-world products.

It is reasonable to identify two micro- and macroeconomic principles from the video. The first principle includes the equilibrium price and quantity because they relate to the actions of specific economic agents at the micro-level. The second one include supply and demand (in macroeconomics, the concepts of the aggregate demand and supply are often used) as they also determine the dynamics of economic processes at the macro-level. I have categorized these principles because they have a crucial role in understanding of market operations. Market price is important as it serves as an indicator of consumer preferences and potential profits that may be obtained by producers. The equilibrium quantity is important as it shows the point where the quantity demanded equals the quantity supplied (Colander, 2012). Market demand is a crucial concept as it demonstrates the consumers’ willingness to purchase products at different prices. Correspondingly, market supply allows understanding producers’ willingness to produce goods at different prices (Soderbery, 2015). It is necessary to understand interactions between market supply and demand as they demonstrate the general trend of market development.

The author demonstrates four major scenarios of changes in the supply and demand for products (the market for apples is used as an example). The first analyzed situation is the changes caused by the invention of a new disease resistant apple. This factor leads to the growing market supply. As suppliers receive additional opportunities for growing apples, they will increase their production. As the supply curve shifts to the right and the demand curve remains at the previous level, the equilibrium price will decline, and the equilibrium quantity will increase.

The second scenario examined in the video is the impact of the study about apples’ contribution to preventing cancer on the market equilibrium. This study afin the video is launching an advertising campaign by the pear cider industry. As many people may consider apple and pear ciders as substitutes, a new advertising campaign may affect their preferences and tastes. Consumers will tend to consume more pear cider.

However, introducing a new advertising campaign may also affect the market supply. Apple suppliers may evaluate various alternatives for obtaining the maximum revenues from their products. Under the influence of the new campaign, they may expect that consumers will reorient to pears instead of apples. Therefore, some producers may also prefer the pears market over the apples one. It will diminish market supply, and the supply curve will shift to the left. Thus, both the demand and supply curves will shift to the left. It will have a strong impact on the equilibrium quantity, which will decline substantially. However, the ultimate impact on the equilibrium price can be different. There are three possible options. The first one is that the equilibrium price may not change. It will occur if the declines of market supply and demand are proportional. The second one is that the equilibrium price may increase; it will happen if supply declines more rapidly than demand. The third option is that the equilibrium price may diminish; it will occur if demand declines more rapidly than supply. The fourth analyzed scenario is the situation when apple pickers will unionize. They can demand wage increase and have a higher power to influence market processes (Sting & Huchzermeier, 2014). As a result, the supply curve will shift to the left; it will lead to the growing market prices and lower supply.

The knowledge of these basic economic principles is applicable to different real-world situations. In my workplace, I may adjust the prices for products timely as well as predict the potential market dynamics. In this way, the company’s operations may become more flexible, which will both maximize its revenues and consumer satisfaction. I may also apply this understanding to many real-world products such as smartphones. I realize that the prices for these gadgets depend not only on their technological characteristics (as many people assume) but also on the combination of market supply and demand. Therefore, if I want to economize my funds, I may wait for several months as the demand for smartphones demonstrates the rapid dynamics. When the demand for a given gadget declines, its price will also decline. In this way, I can determine the optimal period for making my purchases.

The concepts of microeconomics help me to understand the factors that affect shifts in supply and demand on the market price and quantity. I realize general economic thinking and interests of both consumers and producers. The former want to maximize their utility and experience the influence of various advertising campaigns, scientific studies, etc. The latter want to maximize their profits and have to be very responsive to market signals. Understanding of the general motivation and incentives of all parties involved allows comprehending market dynamics. The concepts of macroeconomics are also helpful as the impact of demand and supply on the one hand and the aggregate demand and supply on the other hand are very similar. It shows that the basic economic laws are the same both at the micro- and macro-levels.

One of the most important aspects demonstrated in the video is the price elasticity to demand. It refers to responsiveness of market demand to changes in market price. If the price elasticity is high, then even small changes in prices lead to a considerable decline in the quantity demanded and vice versa. For example, in the third scenario (when the advertising campaign is introduced), the impact on the new equilibrium market price depends on the existing elasticity of demand and supply. If the former is higher, then the new market price will increase and vice versa. Therefore, markets with high elasticity of demand are more flexible and dynamic in comparison with those with low elasticity.

Moreover, firms also have to adjust their pricing strategies to the observed price elasticity of demand. If elasticity is high, firms are less interested in increasing market prices as it will lead to a substantial reduction in the quantity demanded (Tate, Mollenkopf, Stank, & Da Silva, 2015). If elasticity is low, then firms are more interested in increasing market prices as it does not affect the quantity demanded substantially. Therefore, firms tend to orient not only to their costs of production and available market alternatives but also to the elasticity of consumer demand. In this way, they can be able to predict the dynamics of equilibrium prices and quantities.

It may be concluded that the concepts of market price, quantity, supply and demand are crucial for understanding the existing market dynamics. Both consumers and producers depend on these market elements. Consumers are interested in purchasing products at the lowest possible price while producers want to maximize their revenues through higher prices. The equilibrium quantity reflects equality between the quantities demanded and supplied at the equilibrium price. Market supply and demand demonstrate the willingness of consumers and producers to buy or sell products at different prices. The analysis of four major scenarios helps to understand the impact of changes in market supply and demand on the equilibrium price and quantity. I may use it in my workplace and in planning my purchases. Firms also have to consider the level of price elasticity of demand when setting proper market prices. Other market components being equal, high elasticity should correspond to lower prices and vice versa. In general, this knowledge may serve as a strong basis for further analysis of microeconomic problems. It is necessary both to understand the major economic laws and be able to apply them consistently.