The Basics of Microeconomics

The Basics of Microeconomics

Economics dictate every aspect of our lives in the free market world. It is an interesting topic that very few people truly understand. There are two major fields of economics; microeconomics and macroeconomics. It is not always possible to make a distinction between microeconomics and macroeconomics. For example, the difference between conflicting schools of thought in macroeconomics is sometimes traced to differences in assumptions related to microeconomics. Microeconomics, explains how the interplay of supply and demand in competitive markets creates a multitude of individual prices, wage rates, profit margins, and rental changes. Microeconomics assumes that people behave rationally. Consumers try to spend their income in ways that give them as much pleasure as possible. As economists say, they maximize utility.[1] There are three central components to microeconomics; supply, demand, and market equilibrium.

Supply is best defined as the quantity of a product or service a producer or manufacturer is willing to provide, and at what price the good or service will sell for. The main factors for the producer to consider are the cost of production versus the market price. When supply exceeds demand most sellers will lower prices to stimulate an interest in their product, when demand is greater the seller will raise prices in an effort to build revenue. In a perfect environment supply will always be equal to demand enabling the producer to have a steady flow of positive revenue. Supply then is not merely how much of a product is available, but more importantly how much of the product the consumer is willing to buy. For example, just because you produce enough low price remote controls to provide five to every household does not mean the consumer will buy five. This is true even if you are able to make money despite now having a large surplus of remote controls. This falls into what is called diminishing...