Major Issues in Microeconomics

Major Issues in Microeconomics

Thesis: Elasticity and utility are some of the strongest themes in microeconomics.

Elasticity

Elasticity in an economic view defines proportional variation of a variable dependent on or influenced by changes of another variable. Elasticity in microeconomics focuses on the responsiveness of the market demand and supply to fluctuations in certain conditions, for instance price elasticity of demand. According to Investopedia (2011), elasticity clarifies the apparent generalization contained in the law of demand, by explaining the measure of impact of changes in price occasioned by demand or supply fluctuations. The author mentions that elasticity gives specific detail such as percentage increases or decreases in quantity demanded or supplied. The application of elasticity in practical economics involves decision making regarding how sensitive the market will react to commodity price changes. Elasticity is therefore a very important microeconomics theme. Quantity sales techniques such as in holding sale offers target to reduced prices to induce proportionate number of extra sales. It follows that pricing strategies must bear in mind the responsiveness of the market regarding demand and supply intricacies. To be specific, price elasticity of demand and supply are usually used.

Price Elasticity of Demand

The impact of changes in price to quantity demanded are depended on slope of the demand curve, where steep and gentle slopes experience the impact differently. A steep demand curve experiences relatively smaller impact of quantity demanded changes than a gentle curve, under an equal price change. Changes in prices will proportionately induce changes in quantity demanded depending on the sensitivity of demand curve to changes in price.

Under price change Y in the illustration below, D1 is price inelastic while compared to D2 since it causes the smaller change in quantity demanded X1 while D2 causes relatively more change in quantity demanded (X2). These changes create an inverse relationship as explained by the law of demand. Perfectly inelastic demand curve would be vertical while perfectly elastic demand curve will be horizontal lines.

1600200391160D2

D2

952500111760D1

D1

85725174625Price per Mug

Price per Mug

4762509525Y

Y

1314450260985Quantity Demanded

Quantity Demanded

248602522225X2

X2

180975022225X1

X1

Price Elasticity of Supply

Changes in prices of commodities cause proportionate changes in the quantity supplied in a direct relationship. In the short run, producers respond to prices by either reducing quantity supplied or increasing it proportionately with changes in the market price of the commodity. Commodities with a steep slope will experience slight changes in quantity supplied than gentle slopes under the same price changes. Elasticity determines the impact created by changes in price and the subsequent behavior of the suppliers. An illustration similar to the one above illustrating demand but using a direct relationship explains the mechanism of the elasticity of demand to price.

Utility

In economics, utility is the estimate of the measure of satisfaction that a human being obtains from resources. Human beings are in an incessant quest to increase utility in the resources they have access to. Utility therefore presents itself as a very important microeconomics theme. Consumer behavior is guided by the need to increase utility in various ways. If a commodity has utility, it can be said to possess utility (wikipedia, 2011).

Total Utility

Total utility is an expression of the total satisfaction obtained by consuming a certain quantity of a commodity. For instance, after taking two ice-creams, total utility can be defined as the measure of satisfaction thereby obtained.

Marginal Utility

Marginal utility is the measure of utility obtained upon consumption of an additional unit of a commodity. It is therefore the measure of total utility divided by the measure of consumed commodities. In economics, marginal utility decreases with every additional consumed commodity.

Conclusion

Microeconomics can not be exhausted without covering utility and elasticity, which are very important concepts in macroecomics as well.

References

Arnold, R. (2008) Macroeconomics. Mason, OH: Cengage Learning

Boyes, W. & Melvin, M. (2007) Microeconomics. Boston, MA: Cengage Learning

Investopedia, (2011) “Microeconomics,” investopedia.com. Retrieved from: HYPERLINK “http://www.investopedia.com/terms/m/microeconomics.asp” http://www.investopedia.com/terms/m/microeconomics.asp

Wikipedia, (2011) “Elasticity: Economics,” Retrieved from: HYPERLINK “http://en.wikipedia.org/wiki/Elasticity_%28economics%29” http://en.wikipedia.org/wiki/Elasticity_%28economics%29