The Investigation of Market Changes and their Interactions in Microeconomics

About The Study

Microeconomics studies how market structures interact within a market to form a market system. These entities include both private and public players of various classifications, who typically operate with a scarcity of tradable units and less government regulation. A tangible product, such as apples, or a service, such as repair services, legal counsel, or entertainment, may be traded. In theory, the aggregates (sum of) of quantity demanded by buyers and quantity supplied by sellers in a free market may reach economic equilibrium over time in response to price changes; in practice, various issues may prevent equilibrium, and any equilibrium reached may not be morally equitable. There are various market structures. No participant in a perfectly competitive market is large enough to have market power to set the price of a homogeneous product. In other words, every participant is a "price taker" because no one influences the price of a product. In the real world, markets are frequently subject to imperfect competition. Monopoly (with only one seller of a good), duopoly (with only two sellers of a good), oligopoly (with few sellers of a good), monopolistic competition (with many sellers producing highly differentiated goods), monopsony (with only one buyer of a good), and oligopsony (with few buyers of a good) are examples of forms. In contrast to perfect competition, imperfect competition invariably results in unequal distribution of market power.

Firms with imperfect competition have the potential to be "price makers," which means they can influence product prices by holding a disproportionately large share of market power. Microeconomics investigates individual markets by simplifying the economic system and assuming that activity in the market under consideration has no effect on other markets. This is referred to as partial-equilibrium analysis (supply and demand). This method aggregates (compiles all activity) in a single market. The theory of general equilibrium investigates various markets and their behavior. It aggregates (computes the total amount of activity) across all markets. This method investigates both market changes and their interactions as they approach equilibrium.

Production, cost and efficiency

Production is defined in microeconomics as the transformation of inputs into outputs. It is an economic process in which inputs are used to produce a commodity or service for exchange or direct use. Production is a flow, and thus the rate of output per time period. Production alternatives such as consumption (food, haircuts, etc.) vs. investment goods (new tractors, buildings, roads, etc.), public goods (national defence, smallpox vaccinations, etc.) vs. private goods (new computers, bananas, etc.) and "guns" vs. "butter" are examples of distinctions. The economic cost of production is the value of the next best opportunity foregone. Choices must be made between actions that are both desirable and mutually exclusive. It has been said to express the fundamental relationship between scarcity and choice. Part of the cost of making pretzels is that neither the flour nor the mornings are available for other uses. Economic efficiency measures how well a system produces desired output with a given set of inputs and technology. Efficiency is improved when more output is generated without changing inputs, or when "waste" is reduced.

Supply and demand

Prices and quantities are the most directly observable characteristics of goods produced and exchanged in a market economy. The supply and demand theory is a guiding principle that explains how prices coordinate the amounts produced and consumed. In microeconomics, it refers to the determination of price and output in a market with perfect competition, which includes the absence of buyers or sellers large enough to have price-setting power.

Firms

People do not always trade directly on markets. Instead, they may work in and produce through firms on the supply side. Corporations, partnerships, and trusts are the most obvious types of businesses. People, according to Ronald Coase, begin to organize their production in firms when the costs of doing business become lower than the costs of doing business on the market. Firms combine labor and capital and can achieve far greater economies of scale (when the average cost per unit decreases as the number of units produced increases) than individual market trading. There are many producers in perfectly competitive markets studied in supply and demand theory, none of which has a significant influence on price. From that special case, industrial organization generalizes to study the strategic behavior of firms that do have significant control of price.

Market failure

The term "market failure" refers to a variety of issues that may call into question traditional economic assumptions. Although economists classify market failures in various ways, the following categories appear in the main texts. Asymmetries in information and inefficient markets can lead to economic inefficiency, but there is also the possibility of improving efficiency through market, legal, and regulatory remedies, as discussed above. Natural monopoly, or the overlapping concepts of "practical" and "technical" monopoly, is an extreme case of competition failing to act as a producer restraint. One possible cause is extreme economies of scale. In a typical market, public goods are goods that are undersupplied. The distinguishing features are that people can consume public goods without having to pay for them and that they can be consumed by more than one person at the same time.