Current Microeconomic Thought And Theory Research Paper Example

In Economics, it is common to outline general principles that may be used for explanation of development of economy from local to global level as well as behaviour of different stakeholders like private companies, governments, consumers, etc. These principles are usually categorized in three groups: how people make decisions, how people interact with each other and forces/trends that influence the economy. In this paper, they will be briefly presented in order to understand better how companies should act in order to be competitive and responsive to the market changes.
How people make decisions. In the free market economy with abundance of products and services people often have to face trade-offs. They do not have enough money and time to buy and do everything they like. Therefore, they have to make a decision concerning their purchases based on the approximate benefit that a product/service will provide them with. Thus, an opportunity cost may be very different for every alternative. Ideally, people should compare marginal benefits and marginal costs before making a purchase. In order to motivate them make buying decisions faster, companies may provide incentives. The same thing concerns governments that have to decide how to spend revenue correctly. The main challenge that any government usually faces is to find a proper balance between efficiency and equity. Higher efficiency of national economy may lead to lower equity. Secondly, if a government spends much money on infrastructure or defence, less money will be left for the other areas of economy.
How people interact. The most important principle in this group is that trade can make people better off if they interact with each other. Historically, such interaction led to development of trade and specialization in products. As the result, everyone can work more effectively and there are more choices and better prices. The main prerequisite of effective interaction between various stakeholders is a well-functioning free market that is not controlled by the government. In the free market, the government may only intervene when resources are not allocated efficiently and there are market failures (monopolies, not enough public goods or merit goods) or externalities (environmental problems, health, etc).
How economy works. For developed countries it is important to have highly productive economies that rely on highly-skilled labour force and use of technology. It is also important that the government carries out well-balanced fiscal and monetary policies that will keep inflation and unemployment at the very low level. As the result, people will have more money to make purchases. Consequently, manufacturers will produce more products and raise prises. At times of economic crises, the government may intervene and increase the amount of money in the economy in order to stimulate spending. For companies, especially large companies that have to produce large volumes of products, it is crucial that consumers earn enough money and are confident that market conditions will not change. If external business environment is stable, companies will have more chances to be profitable.
Thus when resources are scarce, economic interdependence is beneficial for the economy. A high degree of division of labour leads to creation of a network in which people depend on each other to effectively and efficiently produce goods and provide services. Moreover, interdependence is beneficial, because improvement of one industry may lead to improvement of other industries. As the result, demand and supply of products will simultaneously grow. So willingness and capability to pay more for a product leads to supply curves upward sloping, because producers would like to sell more products at a high price. On the contrary, if a product becomes cheaper due to consumers’ inability to buy it at a high price, producers will supply less of it or change their business strategy and will focus on stimulating the demand. Additionally, there is the substitution effect and diminishing marginal utility that also impact the demand curve.
In order to receive an optimized profit, a company must recognize the supply-demand equilibrium concept and try to set correct prices for products/services. In theory, an equilibrium price is a price at which market demand and supply are equal. In reality, it is very difficult to calculate such a price, but companies should analyze market trends and competitors in order to understand in which price range products should be sold. A company may mistakenly charge too little or too much. In the first case, the revenue could be higher. In the second case, there might be overstocking and other problems, because very few products will be sold. So a price at equilibrium is what companies should focus on if they want to stay competitive. Sometimes companies have different pricing strategies, because the society is fragmented and different people are able to pay a different price. Some companies may sell high volumes of products at low prices to as many customers as possible. On the contrary, some companies focus on affluent customers that will be able to pay a high price for a quality product. Equilibrium prices may also depend on the governmental policies. For example, high taxes increase prices. In turn, price controls may set a price ceiling or a price floor, but this kind of policy is usually avoided, because it leads to the deficit and other inefficiencies. Companies will not be interested in selling products at too low or high prices.
Finally, companies should take into account effects of price elasticity of supply and demand. Price elasticity shows change in supply/demand after the change in the price. If products have a high price elasticity of supply, their supply will significantly increase when the price increases. In turn, if products have low price elasticity of demand, their supply will not change dramatically when the price changes. So companies should respond to market changes by controlling volumes of production or regulating prices at which products are sold to customers.