Microeconomics And Macroeconomics: Concepts And Examples

Types of Goods in Microeconomics

The economics studies basically covers two major aspects i.e. Microeconomics and Macroeconomics. Microeconomics deals with studying the behavior of an individual, households or a firm of an economy, in their decision making process and also allocation of resources.  The microeconomic theory usually applies to the goods and service markets and deals with various issues at individual or economic level. There are different concepts that are required to be studied in order to understand the microeconomic condition of an economy. Such concepts are discussed further.

There are majorly two types of goods: substitute goods and complement good. Economists define substitute goods as the goods that have to experience increased demands with the increase in the prices of other goods which are considered as their alternative and vice-versa. Substitute goods can be used by the consumers in replacement of goods that they are called substitutes of. For example: Pepsi and Coke, Tea and coffee, oranges and apples etc. Different brands of a particular good can be called as its substitutes. It is the general tendency of humans to consume more quantity of a product that has lower prices than the goods that have higher prices. However, complement goods are defined as the goods that are used with one another. In other words, goods are called complementary to each other, when usage of one requires the usage of other (Economicalpedia, 2016). These goods have to experience increased demands when the price of their complement goods decreases and vice-versa. Car and gasoline, Tooth paste and Tooth brush.

Taking an example of tea and coffee, the behavior of individuals in case of substitute goods can be understood. Suppose, the price of brand X of a car in the current market has increased to £ 15 million from £ 10 million and also there is an availability of other brands of the car in the market which are comparatively cheaper than the new prices of  car X in the market. Automatically, the demand of other brands will increase, assuming other factors to remain constant. This will happen because of the human tendency to pay less to achieve the same or comparable degree of satisfaction. The graph given below can clearly show the increase in demand of brand Y cars when the prices of brand Y car also remains same.

Next, taking the example of car and tires, the relationship between the demand and price of complementary goods can be studied. Suppose, the price of same car X has increased and therefore its demand in the market has declined. This will automatically reduce the demand of tires used in such cars. The graph given below can clearly show the impact of increase in demand of brand X cars on the demand of tires, assuming that price of tires remains constant in market.

Demand and Price Relationship

This shows that there is inverse relationship between the price and demand of two products that are substitute for each while there is a direct relationship between the price and demand of complementary goods.

There are various factors that affect the demand of the product in the market such as price of the concerned product, price of other products that are related to the concerned product, the tastes or preferences of the ultimate consumers, the expectations of consumers in the market about the quality and standards of product and the number of consumers in the market (Econport, 2006). The impact that the consumer’s income has on the quantum of product they are willing and capable of buying primarily depends on the type of product in concern. For majority of goods, there remains a positive or direct relationship between the income of the consumer and the quantum of goods demanded by them to buy. If the income of the consumer rises, they are capable and willing of consuming more of what they need or desire and when they have lower income, they have to face funds constraints and hence they are not willing and capable of buying more quantities of the products they need or want (Andreyeva, Long & Brownell, 2010). This happens in the case of normal goods. However, there are certain goods in the market which experiences reverse relationship between the consumer income and their demand for such goods. For example, a low quality ground beef is generally bought by the people who have low incomes or lesser funds because it is inexpensive to be bought (Fuchs, Prandelli & Schreier, 2010). But, when their income rises, they might decide to switch to leaner cuts of the ground beef or even they might give up on beef entirely to favor beef tenderloin. In such cases, there is the inverse relationship between the quantity demanded of goods and the consumer income. In economic terms, such goods are called as inferior goods.

To graphically illustrate the direct relationship between consumer income and their demand of normal goods can be undertaken using the example of a normal individual who is earning a monthly income of £ 10000 and at this level of income he consumes 3 packets of yogurt per month. However, if his income of increases by further £ 10000 i.e. it becomes 20000, the consumption of yogurt will also increase.

Effect of Income on Consumer’s Demand

Economic efficiency is the situation when all the resources in the economy are optimally utilized in the society’s best interest. In case of efficient economy change in the production of a particular product would affect the other product’s production. Economic efficiency can be achieved if there is proper equilibrium in the demand and supply factors of economy (Page, 2013). When an economy is operating at its efficiency, the change in resource allocation would affect some units of economy because of the fact that it is not possible to increase an individual, company and community’s welfare all at once with the limited number of resources available. To deal with the economic efficiency in an economy, maximum output must be produced with available scare resources (Higher Rock Education, 2018).

Oligopoly is achieved when there are only few firms to dominate the entire market of a particular product or service and hence there is less competition. But, monopolistic competition markets are those markets where there is a presence of large number of firms that are dealing in same or similar product and services. Though oligopoly and monopolistic competition market are both the examples of imperfect market competition, their characteristics varies in the various ways. Oligopolistic markets have higher entry barriers than the monopolistic market. Monopolistic competition markets are more appropriate in distribution and retail sectors as in such sectors the market can easily be bifurcated into smaller segments without experiencing diseconomies of scale whereas oligopoly is generally present in those markets to be controlled by few but large firms (Mazzeo, 2002). Oligopolistic markets are generally found in manufacturing sectors or insurance and banking industries. In certain cases, the dominance of the market is determines its type of market structure (Brakman & Heijdra, 2001). If a market constitutes 4000 firms that are similar in nature it is called as monopolistic competition but the market where the same number of the firms is operating but only 4 or 5 firms are there to dominate the market, then it becomes the oligopoly market. Also, the geographical area determines the market structure as a particular industry might fall in oligopolistic market form when it is functioning in small cities or towns because of few numbers of firms and when the same industry operates in a big city it might fall in monopolistic competition because of presence of large number of firms (Brakman & Heijdra, 2001). Graphical representation of oligopoly and monopolistic competition is shown below:

Economic Efficiency

Market is a place where group of buyers of a specific product meets the group of sellers or providers of such product. A market attains its efficiency in the circumstances when it is perfectly competitive. However, when a market is not perfectly competitive, it has to face its failure. Market failure also results from inefficient allocation of resources in the free market (Fisk & Atun, 2008). In UK economy various markets had to face several failures because of different reasons such as negative (environmental pollution) and positive (provision of facilities like education and healthcare) externalities in the market, existence of merit or demerit goods and public goods, factor mobility etc.

To address the above-mentioned issues, UK government can formulate and execute various policies with the aim of correcting the market failures such as imposition of taxes on the negative externalities and granting subsidies for the positive externalities. Taxing the negative externalities will not only control the problems like pollution but it will generate revenue to further develop the economy. Provision of subsidies to the positive externalities can encourage people to strengthen the UK economy more by providing adequate employment by imparting proper education and healthcare services. Also, changing or assigning the property rights could be another policy to deal with market failures as in the case of occurrence of negative externalities, the owners of the properties can sue the individuals damaging or polluting the properties. Imposition of stringent laws and regulations can also restrict the unhealthy consumer behavior such as bans on drunk driving and legalizing an age for smoking. Also, the government can make it necessary for the firms operating in the economy to obtain pollution permit from the environmental regulators (Bromley, 2007).

Conclusion

It can now be summarized that economics is the integral branch of economic studies and is it vital to understand each concept of microeconomics in details to identify the behavior of the individual units of an economy such as individuals, firms, domestic units or industries etc. The equilibrium in the market can only be maintained if there is proper supply and demand of the products. If it is not maintained, the market becomes inefficient.

Reference

Andreyeva, T., Long, M.W. and Brownell, K.D., 2010. The impact of food prices on consumption: a systematic review of research on the price elasticity of demand for food. American journal of public health, 100(2), pp.216-222.

Brakman, S. and Heijdra, B.J. eds., 2001. The monopolistic competition revolution in retrospect. Cambridge University Press.

Bromley, D.W., 2007. Environmental regulations and the problem of sustainability: Moving beyond “market failure”. Ecological Economics, 63(4), pp.676-683.

Economicalpedia, 2016. Difference Between Complementary and Substitute Goods. Available at:  https://economicalpedia.wordpress.com/2016/03/16/difference-between-complementary-and-substitute-goods/ Accessed on: 18.07.2018.

Econport, 2006. Factors Affecting Demand. Available at: https://www.econport.org/content/handbook/Demand/Factors.html Accessed on: 18.07.2018.

Fuchs, C., Prandelli, E. and Schreier, M., 2010. The psychological effects of empowerment strategies on consumers’ product demand. Journal of Marketing, 74(1), pp.65-79.

Higher Rock Education, 2018. Economic Efficiency. Available at:  https://www.higherrockeducation.org/glossary-of-terms/economic-efficiency Accessed on: 18.07.2018.

Mazzeo, M.J., 2002. Product choice and oligopoly market structure. RAND Journal of Economics, pp.221-242.

Page, T., 2013. Conservation and economic efficiency: an approach to materials policy. RFF Press.
Fisk, N.M. and Atun, R., 2008. Market failure and the poverty of new drugs in maternal health. PLoS medicine, 5(1), p.e22.

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