Microeconomics is concerned with the study of behaviour of how individual family units and firms make their choices on allocation of inadequate resources. Microeconomics is further involved with assessment of market dynamics which help to mark relative prices of goods and services as well as distribution of inadequate resources amid many different uses. It also assesses failures that occur in the market leading to failure of markets to give forth good results. Concepts of perfect completion in addition to general equilibrium are considered in the study of microeconomics. This article will discuss microeconomic theory and the concepts associated with the market dynamics.
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The theory of supply and demand normally presumes that there is perfect competition in the market. This means that the market has lots of buyers and sellers but they lack the ability to affect the price of goods and services by any considerable value. However, this fails to happen in the real-life situation since some individual buyers and sellers can influence the prices independently. A market with perfect competition is one where no participant has total power to determine the price of an identical product. Perfect competition is used as a standard for measuring real-life and incorrectly competitive markets.
Demand is the amount of goods or service that customers are willing and capable to buy at a certain price in a certain time. The individual demand for specific goods as well as their degree of demand at each market price reflects the value that customers attach to them. Additionally,demand represents the anticipated satisfaction from purchase and consumption of the product or service. On the same note, market demand is the summation of individual demands for a given product from every customer in the market segment.
Demand for a particular product should be effective. This implies that it is only after a customer’s desire to purchase a product is supported by a capacity to pay for it that demand becomes effective in the market. Customers must display enough purchasing power to have any effect on the allocation of limited resources. Much of the microeconomic theory revolves around the concept of demand. There are many factors that influence demand, however, microeconomics is well understood when all other factors are taken to be constant and ineffective. Ceteris paribus is an assumption by economists that all factors do not change except the price of a good or a service.
The demand curve illustrates the relation between price and quantity of a product or service demanded over a period of time. The customers are normally willing to buy less at higher prices than at lower prices. Also, at lower prices, people are obliged to demand more of a good or service. The supply and demand curve illustrates how prices change due to balancing of supply and demand of products.
The above diagram represents a demand curve. It is a straight line that shows relationship between demand and price. It is worth noting that the relationship can never be a straight line in a real life situation. A change in the price value results to a variation in ammount demanded. For instance, a decrease in price of products leads to increase in demand whereas increase in price causes the demand to decrease. There are other factors apart from price which influence the demand for particular goods and services in the market.
The factors of demand for a certain product is summarised as follows:
D= f (Pn, Pn....Pn-1, Y, T,P,E)
Pn is the price of the product
Pn...pn-1 are the prices of other substitute and compliment products.
Y is the consumer incomes
P is the level and age-structure of the population
E is the price expectations in the future
It is worth noting that there are exceptions for the law of demand. Demand does not always change inversely with the price as explained by ostentatious consumption and the influence of speculative demand.
Ostentatious consumption is a concept that suggests that since some products are luxurious, satisfaction in their usage results from its price and the ability of the customer to show off its usage to other people. In this case, the demand of the product is a directly related to its price. Some of these luxurious products include designer clothes, luxurious cars among other luxuries. These products have a high income elasticity of demand and their demand increases exceedingly proportionately to the increase in income.
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