QUESTION

Here is one Microeconomics essay task. So how much will minimum charge for this?

What factors influence supply and demand (using some reallife examples to enhance your arguement) .  How is demand and supply affected by external issues (eg government action).
you can discuss different aspects of markets, elasticities, price, cost and benefits, subsidies, labour,taxes, trade, income, monopoly,compitition,capital, different goods etc with supply and demand in your essay.

It is an essay, and need an intro, main body and conclusion.Microsoft Word Document or in Rich Text Format (RTF).

Total length 2500 words.

SOLUTION

Introduction

The concepts of micro economics provide an insight into how the operations take place in the economic environment. The basis for the micro economics has been based on certain generalized assumptions that are applicable on the majority of aspects of the economy and thus the inferences can be drawn from them. The concepts are developed which form the basis of this study.

The above study has thus been differentiated from the macro economics wherein the holistic approach is provided to the economy wherein the parameters that prevail in the market and their effects are studied on a broader level. In this study the role of trade policies and the government policies and the foreign exchange and the role of foreign direct investment is studied.

In the study of micro economics various parameters such as supply and demand, effects of external factors such as government policies, taxes etc and the internal factors like type of market, utility of the goods and competition in the market on the demand and supply.

This study is very important as it provides answers and possible solutions to the issues prevailing in the world like, setting equilibrium in the market, variation in the demand with the price, effect of substitutes in the market etc. While the discussion on the demand and supply prevailing in the economy other concepts like elasticity of demand , cost and benefits, income, monopoly and indifference curve also become important and an understanding of them while give the overall knowledge of the system and would make it easier to relate the different concepts.

It is very important to have an insight into all the topics that have been mentioned above. In this essay an understanding of these concepts will be discussed and it will be attempted to show how these are correlated. These concepts will be discussed by the example and graphs and the study of the data related to this study of economics.

Demand and Supply

The study of demand and supply is very essential for the determination of price in the market. The equilibrium in the market is determined by the interaction of demand curve and the supply curve. In the below diagram the relation between demand and supply prevailing in a market are shown. The demand and supply curve have been created and the equilibrium point is established by the intersection of the demand and supply curve.

As shown in the above diagram the demand line is designated by D1 and the line s1 is for the supply curve that is there in the market. The intersection point C is the equilibrium point and thus gives the quantity demanded at equilibrium and the price of the commodity at equilibrium..

Let there be scenario where the demand is increased by certain number of units at the different level of price of the commodity because of certain changes in the policies of the government and there is anticipation that the prices will rise in future. The market diagram will be changed with demand curve shifting upwards (Stonier &Hague, 1980). This is shown below. Thus the new equilibrium price will be the intersection of the demand curve and the supply curve.

This shift in the demand and supply curve show that the area covered by the demand curve and the horizontal equilibrium line (Stonier &Hague, 1980). This area covered is called the supply surplus and the area covered by the horizontal equilibrium line and the supply curve towards the left of the equilibrium point is the consumer surplus. Thus as seen above the consumer surplus and the producer surplus has reduced thus showing the improved efficiency with the shift of the equilibrium point.

Elasticity of Demand

Elasticity can be defined as degree of change in demand or supply of a product. Elasticity in other words can be said to be the responsiveness of demand or supply to change in price. The variation in elasticity can be seen from product as the elasticity of a particular product may be different from that of the other (Varian, 2009)..  For example necessities show insensitiveness to change in price as the demand of such products has to be fulfilled. Consumer will also be buying to fulfill the necessities whether the price increase or not. However it can be said that the demand may increase more if price reduces. Thus the elasticity will be high up to certain level.

Below is the formula for elasticity
Elasticity = (% change in quantity / % change in price)

The concept of elasticity of demand has been illustrated below with the help of an example below.

In this table the quantity demanded at each price level and the revenue generated is shown. Thus the elasticity coefficient formula for which has been shown above is calculated.

Below are different examples that show the relation between demand and supply with the change in market scenario.(Hauge,1980)

1. Let us consider the market of houses. In this case demand for household property will go up as there is increase in income. This is because there will be funds available for investment and thus has impact on the demand for household property.
2. In another example let us consider the market for electronic appliances. Market for electronic appliances will increase as cost of production falls. Fall in prices of electronic appliances will thereby bring in an increase of the demand.
3. In this example the impact of demand of a commodity relative to the demand of complimentary goods has been discussed. Market for tea will increase when there is shortage of coffee in the market because these are complimentary goods and will have inverse relation. The reduced supply of coffee will increase the demand of tea and thus will result in increased prices of tea. (Bergstorm,2010)
4. In this case the effect of demand and supply on the price of those goods is considered which have dependency on elasticity which may be low or high. Market for public transport will increase with increase in price of petrol. This is because the consumer will not be willing to spend much on petrol thus will have more dependency on the public transport there by bringing in the stability by shift in the equilibrium point.

Indifference Curve:

Indifference curves are used for building models that illustrate relation between consumption of goods having different utilities (Milton, 1953). The definition of indifference curve may well be, Indifference Curve shows all combination of products that will yield same level of satisfaction. This may also be called utility. This kind of analysis by indifference curves is based ordinal theory of utility rather than cardinal utility theory.

The above figure illustrates a ‘map’ of indifference curve that a hypothetical person may possess for product A and Product B. The curved line indicates one indifference curve for the person and represents combination that provide person with given level of desirability.(David,2010)

Indifference curves however in practical matter cannot be used to make decisions. However the utility function can be used to derive utility function.

Total Utility

The concept of Total Utility has to be derived from marginal utility. Total utility is the aggregate fulfillment from a particular goods or services by consuming it. The marginal utility for every goods or services will be different and thus the total utility will also be different. Mathematically Total Utility can be said that it is the aggregate of all the marginal utilities of a particular entity. It can be clearly understood that every consumer will stride forward to attain maximum possible total utility.

One of the ways to attain the maximum total utility is to have a combination of products.

As per the law of diminishing marginal utility the satisfaction will drop as the consumption will increase. Thus the total utility will increase at lesser rate as the consumption of a particular goods or services increases.

Types of Market

There are different types of markets based on the market setup in an economy. These have been differentiated based on the number of suppliers and consumers in the market. These have been discussed below.(David,2008)

The monopoly is the market structure which has been attributed to the presence of single supplier for the goods that have high demand which is because of the importance of the goods for the community as a whole or the pre4sence of large number of customers. (Gillespie,2011). In today’s world the monopoly is not taken as the presence of single suppliers but it is said that the monopoly exists when there is big supplier which has competitive advantage over the others present in the market and thus has control over the market and can impact the response of the market.

Below are some of the features of Monopoly.

1. Monopoly generally refers to the presence of single supplier in the market.
2. There are no close substitutes for the one in Monopoly. For Example the railways in India and some time back the Post in Australia had enjoyed Monopoly wherein there is no competitor for them in the market.
3. Monopolist is the price maker in the market and thus decides the price of the commodity in the market. However the rule for the existence of Monopoly is that the marginal revenue is equal to the marginal cost.
4. There are barriers to entry in the market for the new entrants. This is because either the profit margins are not there as it will only be possible in case there is economies to scale or otherwise barriers are created so that new entrants cannot enter the the market. This is done in developing economies.

The monopoly market does have some pros and cons. There are a large number of sectors that enjoy monopoly; this is because the investments required in such sectors are huge The monopoly market is in better position to pursue research and development activities this is at the same time the disadvantage as the efforts been put are limited because there is no incentive in the sense that there is no competition being offered to the monopolist. Another major point is that of economies of scale.. At the same time is not favorable as the consumers face the issue of high prices in the monopolistic markets. Thus it may lead to pressure on the sector and may lead to effects which are not desirable and may become difficult to handle and put pressure on growing economies.

Monopolistic Competition

The monopolistic competition lies in between the perfectly competitive markets where there is competition amongst the suppliers who are present in huge numbers and the monopoly which has single supplier or single supplier that controls the whole market. In this type of market there are  few major players in the market that are having specialization in different sectors of the same market and thus does not compete with each other. Thus these suppliers enjoy monopoly with in the sector or the market by providing different services or goods in the same market.

Below are the characteristics of the monopolistic competition market structure

1. The market has many suppliers but they have differentiated products.
2. Products that are available in the market are not homogenous but are differentiated thus there exists pseudo monopoly in the market
3. It is difficult to estimate the competition level in the market
4. There are no significant barriers to entry thus the barriers to entry are significantly lower than the monopoly market.

Macroeconomic Study: Government Subsidies and Trade Policies

Below discussed are the two of the major macroeconomic factors that have been studied in detail by the economists across the world. These are Subsidies by the government and the trade policies of the government. The below discussion on these factors will provide an insight on the subject.

The government policies and the subsidies have a huge impact on the economy. This concept is related to the equilibrium in the market where the Income minus spending is the saving. This concept is also applicable for the governments also. Thus the government policies of providing subsidies has a huge impact on the inflation and the exchange rate of the currency. It is very important that the pending by the government as subsidies are in the manageable level.

The trade policies are another important concept and the growth of the economy on the whole is very much dependent on the trade policies of the government. Autarky is the state where a country or an economy is self sufficient and is able to meet all the requirements from the given resources in the economy. The state of Autarky does not mean that it is the best possible solution for the economy rather it means that the economy equilibrium is achieved. However taking the comparative advantage will be more helpful in generating trade surplus and meet the demand of larger part of the economy.

Thus the countries should integrate together and work on the comparative advantage. The comparative advantage for two economies will result in creating trade surplus and thus result in shift in equilibrium price which will be at a position where the price will be less than the earlier equilibrium point.

Conclusion

The above discussion has certainly been informative and suggests the relation between the various factors and helps in developing the understanding of the economic concepts. In the above discussion it has been observed the importance of the demand and supply curve and how there can be shift in the demand and supply curve effect the price levels of the goods in the market.

The concept of effect of elasticity of demand and the impact of complimentary goods on the actual consumption and the price level of primary goods in the market.

There are other concepts that have been discussed including the elasticity of demand, indifference curve and the types of markets. In the conclusion it thus becomes important to touch upon the concept of marginal cost which is also very important. The marginal utility of the commodities in the market decrease with the consumption and thus the graph of the marginal cost is a U shaped curve.

The concept of Indifference curve has also been very useful as it has shown the relation between the two goods that are mutually exclusive and thus is helpful in understanding the relation between the consumption of two different types of goods. The indifference curve has been studied by various practitioners and one of the function that have shown this relationship has been given by Cob Douglas.

The types of market that are developed based on the regulations and the types of competition in the market have also been discussed. There are different types of market. Of these only monopoly and monopolistic competition markets has been discussed. However it has certainly provided an insight for the Oligopoly and perfect competition markets.

It is very important to have an insight into all the topics that have been discussed above. In this essay an understanding of these concepts has been discussed and it has been attempted to show how these are correlated. These concepts have been discussed by the example and graphs and the study of the data related to this study of economics and thus has been easily shown the relation between the various concepts. Overall this essay discusses the basic concepts of economic and the factor that impact the conditions in the economic environment and thus help in estimating the future scenario that may be prevailing and on the steps that need to be taken to have favorable conditions in the market.

References

Stonier A.W., Hague D.C. (1980). A Textbook of Economic Theory. 5th ed.: Longman Higher Education. 724

Andreu Mas-Colell, Michael D Whinston, Jerry R Green. (1995). Microeconomic Theory. The Canadian Journal of Economics. 21 (2), 436

Varian H.R. (2009). Intermediate Microeconomics: A Modern Approach. 8th ed.

Bergstorm T.C., Varian H.R. (2010). Workouts in Intermediate Microeconomics: . 8th ed

Bouman, John: Principles of Macroeconomics – free fully comprehensive Principles of Microeconomics and Macroeconomics texts. Columbia, Maryland, 2011

Gottheil, Fred M., and Wishart, David. (1997). Principles of Economics with Study Guide. Cincinnati: South-Western College Publishing

Friedman, Milton (1953), Essays in Positive Economics, London: University of Chicago Press

Gillespie A (2011). Foundation of Economics, Oxford University Press

B. Douglas Bernheim, Michael D. Whinston (2008) Microeconomics

David Besanko, Ronald Braeutigam (2007) Microeconomics: Study Guide: An Integrated Approach

David Besanko (2008) Microeconomics: International Student Version

The Economist (2010) Guide to Economic Indicators: Making Sense of Economics

Neil Fuller, Nigel Proctor (rev.) (1997) Fundamental Economics

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