The Subject and Microeconomics Methods

Date: Nov 22, 2018


The microeconomics is one of the two components of the modern economic theory. A subject of its research is the process of market pricing and its role in a national economy. Specificity of the microeconomic approach consists that the national economy analysis begins with supervision over behavior of the separate economic subjects, which interaction during achievement of the purposes forms a public economy. The basic method of the economic analysis is modeling of studied processes. The behavior of separate economic subjects is described by means of optimizing models, and results of their cumulative interaction - by means of equilibrium models. On degree of completeness of coverage of studied, interrelations allocate models of partial and general balance, on duration of supervision over processes - static, a comparative of static and dynamic.

Full representation about the mechanism of pricing and its role in a national economy can be received only on the basis of models of the general economic balance. Nevertheless, in the didactic purposes micro-economics studying begins with construction of models of behavior of separate economic subjects and partial balance. In teaching of the modern economic theory along with a verbal statement of a subject widely use mathematical methods of the analysis and graphic representation of economic events that provides a fruitful combination of depth and availability at material studying.

Concept of Demand

Supply and Demand, Individual and Market Demand

Demand is the requirement presented in the market for the goods. Demand is the only requirement, which is provided by presence of means of payment (money) of the buyer. Therefore, demand, as a rule, is less than requirement since the price limits the number of buyers. Demand shows the volume of possible purchase of the goods, which consumers in a condition to buy for certain price in a certain period of time and with their income. Demand is the potential purchase of the goods.

During market demand formation there are the social effects complicating this process, because of formation of feedback between individual and market demands. Among arguments of function of individual demand there can be a market demand volume. Such two effects are the most known. The emulation effect is expressed that the individual increases the demand for the blessing if the number of buyers of the last grows. The snob effect is the phenomenon opposite to emulation effect. The volume of demand of "the snob" is less than more than the given blessing buys others. A special version of effect of the snob is the vanity effect expressed in purchase of the blessings, possession with which underlines exclusiveness of their owners, which presume that is inaccessible to another. Mutually opposite orientation of effects of imitation and snobbery partly will neutralize their action on market demand volume; therefore, at the pricing analysis in the separate markets they can be neglected. But even if not to consider the feedback arising under the influence of social effects, market demand function has on two arguments more than function of individual demand. Firstly, at the set preferences of individuals and their budgets the market demand varies unidirectional with change of number of buyers. Secondly, at the set size of the national income (the sum of incomes of all citizens) the market demand for the separate blessing, as a rule, depends on degree of differentiation of individual incomes. When incomes at all consumers are identical, then the configuration of a curve of a market demand coincides with a configuration of a curve of individual demand, which is usually bent concerning the beginning of co-ordinates as in process of demand saturation its elasticity under the price decreases. In the process of increase in differentiation of individual incomes the market demand curve becomes convex concerning the beginning of co-ordinates. Besides, the number of its consumers and degree of differentiation of individual incomes concern specific arguments of function of a market demand for the blessing. Elasticity of a market demand is more than elasticity of any of forming its individual demands.

Non-price Factors of Demand

The major non-price factors of change of demand are:

  1. Tastes and preferences of the consumer. Change of consumer tastes can be caused advertising, fashion change, occurrence of new products in connection with new technologies, etc.
  2. Number of buyers. The increase in the market of number of buyers (with other things being equal) is caused by increase of demand and shift of a curve of demand to the right. Reduction of number of indicators reduces demand and shifts a curve to the left.
  3. Growth or decrease in incomes of the population. Increase of monetary incomes leads to increase of demand for the majority of the goods (on video equipment, fashionable clothes, cars, spirits, meat, a butter, fruit etc.). On the contrary, at decrease in incomes demand for such goods falls.
  4. Dynamics of the prices for the goods-substitutes and the accompanying goods (the interfaced goods). The substitute products are steams of the goods, for financial quote of the rise in prices for one goods conducts to falling of demand for another. The interfaced goods (complementary) - steams of the goods for which the rise in prices for one goods conducts to falling of demand for another (a car and gasoline, a pen and a paper).
  5. Expectations of consumers. Consumer expectations concerning possible rise in prices or increase in incomes can induce consumers to increase in purchases and reduction of restrictions by the operational expenditure. Moreover, expectation of falling of the prices or decrease in incomes leads to reduction of current demand for the goods.

Concept of the Offer

The Law. Offer Function. The Individual and Market Offer

The offer is a set of the goods and the services presented in the market by manufacturers. The price appointed them - "the offer price". A primary factor influencing the offer is the price. The offer law states: at price’s increase the offer increases, at its fall the offer decreases. It speaks: the high price allows receiving higher incomes of manufacture and realization of the given goods that gives the chance to increase enterprise and simultaneously is stimulus for such escalating; therefore, a significant gain of the offer is a consequence not expansions of enterprise on already functioning company.

Not Price Factors of the Offer

  1. The price for resources. Reduction of prices on resources reduces also costs of production. It will lead to the displacement of the supply curve to the right. If the prices for resources rise, the supply will be reduced by the goods, the curve will move to the left.
  2. A technological level of production. Technology perfection allows reducing costs.
  3. A state policy of the taxation and grants. Increase of taxes rises costs of production and consequently, reduces the offer. State grants on production of some goods conduct to decrease in costs and as consequence increase in supply, schedule shift to the right.
  4. Change of the prices for other products. For example, if the corn rises in price, and wheat will fall in price, wheat offer will decrease, and corn will increase.
  5. Expected change of the price of production. At expectation of a rise in prices, farmers can detain export of wheat of a current crop on the market. On the other hand, the same expectation can induce firms to increase capacities and by that to cause increase in supply.
  6. Change of the number of manufacturers. If there are more in the given branch of sellers, there will be also a market supply.

Supply and Demand Interaction

Market Balance and the Balance Price. Changes in Balance

In the market of a perfect competition as a result of supply and demand interaction, the price of the balance providing greatest possible at developed plans of the consumers and manufacturers a sales volume in the given market is established. At realization of transactions under the equilibrium price the sum of surpluses of consumers and manufacturers reaches a maximum. Though each of agents of market transactions of the individual curve of demand or the offer participates in formation of the equilibrium price, last for all is represented exogenous, irrespective of their will in the established parameter. At demand or offer change current market balance is broken, and adaptation process to new balance begins. Depending on that reacts to a disproportion between volume of demand and offer volume - the price or quantity faster, distinguish the adaptation mechanism on Walras and Marshall. In what direction the equilibrium price changes at transition to new balance, depends on scale of change and elasticity of a supply and demand. Character of change of the price in transition from one equilibrium condition to another is described by dynamic models of the pricing, which elementary variant is “the Cobweb Model”. Operating conditions of the market of a perfect competition lead to that the balance price is equal in the long period simultaneously to the minimum average and limiting expenses. This equality testifies to economically optimum use of factors of manufacture in branch. The balance price is the price at which the demand volume is equal to offer volume. According to the demand law, the behavior of the consumer is influenced by the offer price on which the manufacturer offers it the goods. Nevertheless, the offer price is the initial. Further this price faces the demand price. The compromise in the form of goods "market price" on which it is actually on sale and bought (the balance price) is usually reached.

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Price returning to equilibrium level can be interfered by two circumstances:

  • Monopolism of the seller (or the buyer) is artificial keeping the price to own advantage;
  • The administrative price control leading, as a rule, to deficiency or overproduction.

Public Benefit from Competitive Balance: Surplus of the Consumer and the Manufacturer

If the consumer can buy any quantity of the blessings on a uniform price surplus of the consumer - a difference between the maximum sum of money, which the consumer agrees to pay for the bought goods, and that sum of money, which he has paid for that is formed. On change of size of surplus of the consumer, it is possible to judge how change of the price of the goods influences well-being of the buyer. Surpluses of the manufacturer are equal to a difference between total receipts of firm and the general variable expenses. Surpluses of the manufacturer exceed profit on size of constant expenses. They can be considered as the maximum sum of money, which the firm agrees to pay for possibility to make production in the short period. Owing to interdependence of the prices of all blessings and factors of manufacture full representation about the mechanism of market pricing and its role in national economy can be received only on the basis of construction of model of the general economic balance displaying interaction of all markets. The system of the equilibrium prices providing joint balance in all markets is deduced from this model, and conditions of its existence are defined. To establish, whether the general economic balance is the best for a society state of the economy, the criterion of public welfare is necessary. The difficulties arising at construction of such criterion, since it should reflect not only a standard of well-being of individuals forming a society, but also preferences of a society concerning degree of differentiation of its members on a standard of well-being. The right decision to make becomes a complicated task, in particular, that the public preferences reflecting opinion of the majority are not transitive. The distribution of the national income between individuals the criterion of Pareto Efficiency is neutral.

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According to the above information, economic efficiency of a public economy grows only when increase of well-being of one is not accompanied by decrease in well-being of other members of a society. At such approach the economic efficiency problem separates from a problem of distribution of well-being between individuals. The general economic balance reached in living conditions of a perfect competition in all markets is the Pareto effective condition. Pareto effective state of the economy can be reached at various levels of differentiation of well-being of individuals. If preferences of consumers and "the know-how" of the blessings are convex, any Pareto effective state of the economy can pick up a vector of the equilibrium prices supporting such condition in the conditions of a perfect competition. Therefore, in the named conditions the problem of an effective utilization of factors of manufacture can separately be solved from a problem of distribution of well-being between members of a society. The system of the equilibrium prices can direct manufacture and an exchange for the Pareto effective utilization of resources of a society, and by means of the redistributive policy of the state it is possible to support well-being distribution between citizens according to society representations about social justice. However, thus the state should apply such tools of redistribution which do not deform system of the equilibrium prices.

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