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Account on the merits and demerits of macro and micro economics
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Essay on micro and macro economics
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Supply and Demand
Alesha Lispett
ECO/365
April 7, 2014
Benjamin Zuckerman
Supply and Demand
Macroeconomics studies the economy as a whole, while microeconomics studies the individuals and business decisions regarding the prices and goods and services (Investopedia, 2009). Macroeconomics looks at government and industry standard, rather than individual economic decisions. Microeconomics focuses on supply and demand and forces that affect price in an economy. Monopolies, such as GoodLife in the simulation, are a macroeconomic concept, because they are a top down view of a firm’s control of the economy. A monopoly is a market structure where one seller completely controls the market prices and fears no competition because none exist due to the barriers of entry. Price ceilings and price floors also fall under the macroeconomic scope because they are imposed by governments on whole economies or markets. A price ceiling is legal limit imposed by the government on how high the price of a good can be. Conversely, a price floor is the legal limit imposed by the government on how low the price of a good can be. Supply and demand of individual apartments are a microeconomic concept because it focuses on one product and not an industry. Suppliers are more willing to supply at a higher price, to cover their increased cost.
During the simulation, price affected the shift in the demand and supply curves. Apartments were easier to rent at a lower price, but the supplier, Good Life, would incur additional overhead costs per apartment. They were not willing to rent at a rate that would eventually cause losses. The demand curve was shifted when a new company, Lintech Inc. moved into the area, increasing number of demanded apartme...
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... at large. The market receives increased demand for apartments when a new company moves into town, bringing new salaries and more potential customers.
The price elasticity of demand is a measurement that illustrates the responsiveness to changes in price of the demand. For example, it is specifically related to the simulation in regards to shifting the price up and measuring how much the demand falls. It is a percentage change in quantity. The presence of substitute goods, such as detached housing, has the effect of increasing the price elasticity of the demand. Housing is a necessity, which helps to hone down the elasticity. The revenue is maximized when the elasticity is equal to one.
Reference
Investopedia. (2009, February 26). What's the difference between macroeconomics and microeconomics? Retrieved from http://www.investopedia.com/ask/answers/110.asp
This increase in demand leads to an increase in the cost of rents in the
Elasticity is the responsiveness of demand or supply to the changes in prices or income. There are various formulas and guidelines to follow when trying to calculate these responses. For instance, when the percentage of change of the quantity demanded is greater then the percentage change in price, the demand is known to be price elastic. On the other hand, if the percentage change in demand is less than then the percentage change in price; Like that of demand, supply works in a similar way. When the percentage change of quantity supplied is greater than the percentage change in price, supply is know to be elastic. When the percentage change of quantity supplied is less then the percentage change in price, then the supply then demand is known to be price inelastic.
“Microeconomics and macroeconomics can be described in terms of small-scale vs. large-scale or in terms of partial vs. general equilibrium. Perhaps the most important distinction, however, is in terms of the role of equilibrium. While issues in microeconomics seldom challenge the notion of a naturally occurring equilibrium, the existence of business cycles and, especially, unemployment suggests too many observers that macroeconomics raises issues of a different character.” (McConnell & Brue, 2004).
When demand is elastic as with Coca Cola products price changes affect total revenue. When the price increases revenue decreases and when the price decreases revenue increases. For Coca Cola if they notice a decrease in revenue they would offer products at a discount to increase revenue. They do this quite often with sales such buy 2 20 oz. bottles for $3 instead of the normal $1.89 each price
Figure 1: A graphical model of price versus quantity with marginal revenue and demand curves showing an a) elastic and
The law of demand states that if everything remains constant (ceteris paribus) when the price is high the lower the quantity demanded. A demand curve displays quantity demanded as the independent variable (the x-axis) and the price as the dependent variable (the y-axis). http://www.netmba.com/econ/micro/demand/curve/
The market price of a good is determined by both the supply and demand for it. In the world today supply and demand is perhaps one of the most fundamental principles that exists for economics and the backbone of a market economy. Supply is represented by how much the market can offer. The quantity supplied refers to the amount of a certain good that producers are willing to supply for a certain demand price. What determines this interconnection is how much of a good or service is supplied to the market or otherwise known as the supply relationship or supply schedule which is graphically represented by the supply curve. In demand the schedule is depicted graphically as the demand curve which represents the amount of goods that buyers are willing and able to purchase at various prices, assuming all other non-price factors remain the same. The demand curve is almost always represented as downwards-sloping, meaning that as price decreases, consumers will buy more of the good. Just as the supply curves reflect marginal cost curves, demand curves can be described as marginal utility curves. The main determinants of individual demand are the price of the good, level of income, personal tastes, the population, government policies, the price of substitute goods, and the price of complementary goods.
Elasticity is also prominent to businesses. The price elasticity of demand is very important for companies to determine the price of their products and their total sales and revenue. Newell showed that by cutting the price of the Left 4 Dead game in half to $25 during a Valve promotion, its sales increased by 3000 percent (Irwin, 2009)viii.
A change in quantity supplied is just a movement from one point to another in the supply curve. In opposite, the cause of a change in supply is a change in one the determinants of supply that shifts the curve either to the left or the right. These determinants are the resource prices, technology, taxes and subsidies, producer expectations, and number of sellers. An equilibrium price is required to produce an equilibrium quantity and a price below that amount is referred as quantity supplied of zero no firms that are entering that particular business. If the coefficient of price is greater than zero, as the price of the output goes up, firms wants to produce more of that output. As the price of the output goes up it becomes more appealing for the firms to shift resources into the production of that output. Therefore, the slope of a supply curve is the change in price divided by the change in quantity. The constant in this equation is something less (negative number always) than zero because it requires strictly a positive...
The price elasticity of demand is “a measure of how much the quantity demanded of a good responds to a change in the price of that good” (Mankiw) and can be computed as “the percent change in quantity demanded divided by the percentage change in price” (Mankiw). The current price elasticity of demand is quite elastic, meaning that a small change in price results in a large change in demand. This is because “goods with close substitutes tend to have more elastic demand because it is easier for consumers to switch from that good to others” (Mankiw). For example, if AT&T were to suddenly increase their wireless and cellular service prices, many of its existing customers would switch to Verizon wireless without thinking twice because the same service is offered at a lower cost. However, if AT&T were to offer Time Warner networks and television shows as a benefit of becoming a customer, the demand curve would become significantly more inelastic.
To guarantee the increased revenue for the university, I will put emphasis on proper pricing of the tuition fee since price is one of the key determinants of demand. Determining the appropriate price elasticity of demand for university education is of the essence. The elasticity of demand will determine how an increase in tuition fee would impact on the quantity of university education demanded.
The second market structure is a monopolistic competition. The conditions of this market are similar as for perfect competition except the product is not homogenous it is differentiated; thus having control over its price. (Nellis and Parker, 1997). There are many firms and freedom of entry into the industry, firms are price makers and are faced with a downward sloping demand curve as well as profit maximizers. Examples include; restaurant businesses, hotels and pubs, specialist retailing (builders) and consumer services (Sloman, 2013).
One method that Toyota can consider is using the price elasticity of demand to determine whether to increase or decrease the sale price of their automobiles. The responsiveness or sensitivity of consumers to a price change is measured by a product's price elasticity of demand (McConnell & Brue, 2004). Market goods can be described as elastic or inelastic goods as change in quantity demanded for that good. If demand is elastic, a decrease in price will increase total revenue. Even though a lower price would generate lower sales revenue per unit, more than enough additional units would be sold to offset lower price (McConnell & Brue, 2004). In a normal market condition, a price increase leads to a decreased demand, and a price decrease leads to increased demand. However, a change in income affecting demand is more complex.
Microeconomics is the study of an individual economy, or of the different segments within the larger economy, while macroeconomics is the study of aggregate economic behavior, or the economy as a whole (Madura 103). The main goal of macroeconomics is to determine the impact of consumer spending on total output, employment, and prices. To fully understand economics as a whole, we must understand that there are limitations set by the available resources that are used to produce goods and services. These resources that are used in the manufacture of goods and services are called factors of production. Land, labor, capital, and entrepreneurship.
What is Microeconomics? This question was left unanswered when I initially enrolled in this course. Microeconomics is the social science that studies the implications of individual human actions, specifically about how those decisions affect the utilization and distribution of scarce resources. Microeconomics shows how and why different goods have different values, how individuals create more efficient or more productive decisions, and how individuals best coordinate and cooperate with one another. Microeconomics does not try to explain what should happen in a market, but instead only explains what to expect if certain conditions change. For instance, If the price of the new iPhone 8 is higher than the previous model will the consumer buy it? There are several elements that will play into getting an answer for this question, but gives you a general idea of what microeconomics entails.