Introduction
Microeconomics deals with individual firms and units’ decision making in an economy while macroeconomics addresses the greater national aspects. In that respect, this analysis seeks to demonstrate the functioning of both microeconomics as well as macroeconomics concepts by analyzing two current issues in the US addressed in two articles or the news and touching on such concepts. This is achieved by the analysis first explaining the problem as presented in the article and its possible causes. The analysis further explains the significance of the issue and its possible cause of economic fluctuations as well as its effect including benefits and/or costs to the society. Finally, the analysis explains the possible solution to the problem addressing the short run and long run solutions and the economic institutions that could be involved.
Analysis
- Microeconomics issue
- Problem
Goods pricing for a firm is a key microeconomic concept that is dependent on several factors. According to the USA Today’ article by Piller, the US market has of late been faced with an increase in gasoline prices which remains at $3.5 per gallon; a commodity that is crucial in the operation of the economy. This is despite an increased exploration of oil in the country which has resulted to a massive production of the commodity. In this respect, individual gas producers have been blaming the government for a renewable energy standard that it set as the cause of the problem. The firms claim that the set standard was meant to favor the use of renewable energy at the expense of the hydrocarbons by requiring the gasoline produced to have ethanol as a 10% of its constituents. (Piller, 2013)
- Causes
Individual firm’s pricing for a commodity is dependent on several factors which can be from either demand or supply side. These factors include demand for the commodity in the market substitutes and complimentary goods’ prices as well as input factors’ cost. In this case, the cause of the problem is supply sided with the increase in the cost of the inputs imposed by the required use of ethanol in production making gasoline production more expensive than when ethanol was not used. In this respect, the increased cost of production has been passed to the consumers by the firms in terms of high prices. A clear illustration is provided by the diagram shown below. (Clayton, 2008)
- Significance
Gasoline plays a significant role in the growth of an economy due to its use in the transport and production sectors. Therefore an increase in gasoline prices translate into increased cost of a key input factors for the economy hence negatively affecting aggregate demand and supply as producers cut their production and as consumers cut on their spending on the product. Such effect would cause further problems like inflation and even a recession. (Frank & Bernanke, 2001)
- Effect
The increase in gasoline prices has an implication of increasing other goods’ prices and production both of which would negatively affect the economy’s aggregate demand and aggregate supply. In addition, the increase in the key input factor’s price could eventually lead to an increased price level in the country resulting to an increase in inflation which would erode the country’s buyers’ purchasing power negatively impacting on society’s welfare. (Clayton, 2008)
- Solution
A solution to the problem could be addressing the cause to lower the production cost. This can be done through a review of the standard that requires ethanol to constitute 10% of the gasoline produced in the country. By not enforcing ethanol’s use in gasoline production, it would eliminate the extra cost that would eventually translate to lower gasoline prices. (Frank & Bernanke, 2001)
- Short-run and Long-run solution and Economic institutions
A short run solution in terms of the renewable energy standard review can be passed by the congress where the requirement of ethanol use in gasoline production would be scraped. However, this would fail to achieve the long-term intended purpose of the standard in promoting use of renewable energy in the country. Therefore, a long-term solution to promoting the renewable energy use while maintaining lower gasoline prices would involve the institutions like the energy regulation institute as well as the other economic policy institutions coming together and devising a way of creating incentives for use of the renewable energy in the market through programs like subsidy as well as lower taxes. (Clayton, 2008)
- Macroeconomics issue
- Problem
Inflation is a key macroeconomic concept that measures the increase in the level of general prices in an economy. Therefore, a higher inflation rate means that the level of general prices is increasing while a reduction in inflation rate is an indication of a declining general price level. (Barron & Lynch, 1989) According to the Forbes article by Fontevecchia on US inflation, the problem is the increase in inflation that has hit the US economy greatly associated with increasing gas price. In general, US inflation has risen to a three years high with a consumer price index rising by 0.7% in February this year. (Fontevecchia, 2013)
- Causes
Inflation as a general rise in market prices is caused by several factors of either supply side, demand side and other factors. A demand side cause would mean that there is massive increase in demand sparking a rise in prices hence inflation. From supply side, the supply could be short of the market demand sparking a rise in price hence inflation. (Barron & Lynch, 1989) In this case, the great cause of the problem is the rise in the shortage of gasoline which is a key production factor in the economy. This has been sparked by an increase in production cost as well as lack of infrastructure which has negatively affected supply of gasoline. Therefore the problem can be said to be supply side based. (Fontevecchia, 2013) A clear illustration of the cause is provided by the diagram below.
Assuming a long run supply curve which is vertical, while also assuming that the initial aggregate supply in the US economy was at Q1, a significant decline in aggregate supply highly represented by a shortage in some commodities like gas due to poor infrastructure and high production cost as has been experienced in US shifts the supply curve from Curve 1 where the general price level was P1 to a new aggregate supply Q2 where the price level is high at P2 reflecting inflation in the economy. (Barron & Lynch, 1989)
Significance
Inflation in an economy can have a negative impact on aggregate demand with people’s purchasing power being greatly eroded by the increasing prices. In this respect, the problem can cause economic fluctuations in terms of low economic growth or even result to a recession. (Barron & Lynch, 1989)
- Effect
Inflation has a great negative effect in an economy with reduced purchasing power resulting to decline in the society’s welfare as well as reduced aggregate demand which would eventually result into a recession where production in the economy is significantly reduced. (Barron & Lynch, 1989)
- Solution
Solution to the inflationary problem facing US would be addressing the problems causing shortage in aggregate demand. This would increase market supply hence stabilizing prices eventually reducing the general market price. (Clayton, 2008)
- Short-run and Long-run solution and Economic institutions
A short run solution to the problem could be an intervention by the government through the fiscal policies focusing on promoting increased goods production hence increase supply. Such measures would for example include reduction of taxes on products like gas or providing subsidies to the producers. This would significantly reduce the gas prices hence reducing the general price level addressing the inflation. However, a long run solution would entail solving the key causes of the problem that would include the development of necessary infrastructure to enhance increase gas production hence solving the shortage this would lower prices eventually reducing inflation rate. (Frank & Bernanke, 2001)
- Issues’ relation
The two issues are related in that the microeconomics issue addressed; which concerns supply has an effect on the macroeconomic issue addressed which is a supply side problem based on the pricing which is the focus of the microeconomic issue. Therefore addressing the microeconomic issue would also address and avoid problems in the macroeconomic concepts. (Barron & Lynch, 2001)
Conclusion
The analysis has clearly demonstrated the operation of both microeconomic and macroeconomic concepts in an economy with an illustration of causes and explaining possible solutions to the problems. In conclusion, the analysis has shown that there is a close relation between both concepts with an interaction which would require addressing both sides in addressing a problem in any one of them.
References
Barron, J. & Lynch, G. (1989). Economics. London: Richard D. Irwin Inc.
Clayton, G. (2008) Economics: Principles and Practices. New York: McGraw-Hill. ISBN.
0078747651.
Frank, R. & Bernanke, B. (2001). Principles of Microeconomics. New York: McGraw-
Hill/Irwin.
Fontevecchia, A. (2013). Rising Gas Prices Fuel Inflation As Headline CPI Hits Highest
Level In More Than Three Years. Forbes, 15 March 2013, Retrieved from,
http://www.forbes.com/sites/afontevecchia/2013/03/15/high-gas-prices-fuel-inflation-as-headline-cpi-hits-highest-level-in-more-than-three-years/
Piller, D. (2013). High Gas Prices Spark Finger Pointing. USA Today, 20 March 2013,
Retrieved from, http://www.usatoday.com/story/money/business/2013/03/20/high-gas-prices/2004837/
