In this world of competition, it is very important for businesses to understand various fields of study in order to apply various concepts to operate successfully. Microeconomics is one of the fields of study that a business must learn from and implement its concepts to operate and sustain. Businesses can only sustain if it achieves its predetermined goals and objectives, which for most firms is to generate profit by selling the products and services it manufactures. Growth and success of a firm entirely depend on how effectively and efficiently it operates in given market scenario, which requires firms to carefully analyze its environment, minimize its costs, and maximize its profit.
Microeconomics is a science that studies the behavior of entities as to understand how they make their choices and decisions. It studies how these entities interact in the market and how the government tries to influence their choices and decisions. Microeconomics helps in understanding many concepts and theories, for instance, the demand and supply, market equilibrium point, price mechanism, market structure, cost analysis and profit maximization, market efficiency, the impact of government intervention and many more.
Microeconomic concepts are very important for management of a firm, as these theories help in understanding the behavior of consumers which is important to respond to their desires and demands. The number of products and services to be produced, supplied can be only determined through careful study of behaviour of the potential market. The study of demand and supply model is important in order to make decisions regarding what to a produce, how much to produce and for whom to produce and also, to determine the price per units to be produced and supplied. It is a powerful tool which helps in predicting how the changes in the behavior of entities affect the market equilibrium price and quantity.
Another important factor that impacts the business is the price elasticity of demand, it can be defined as, “the level of responsiveness of quantity demanded with the change in price”. The firms should understand that customers are very sensitive when it comes to the price of goods and services, it can be assumed that there will be an increase in the no. of customers who are willing to buy the products if the price is low, and vice versa. When determining the price of the goods and services, a business must understand and identify the nature of their goods and services, check whether it is elastic, or sensitive to price fluctuation, or inelastic. It is important to consider the nature of the product and factors affecting its demand and supply while determining the prices.
Understanding the market structure is also an important factor. There are various types of market structures categorized in microeconomics and they are oligopoly, perfect competition, monopoly, monopsony, and monopolistic competition. Each of these categories have distinctive characteristics that affect the nature of competition and market price. For instance, in perfect competition, there are many no. of firms selling homogeneous products competing, where no single firm has substantial power. Hence, the industries produce an optimum level of output as none of the business firms influences the prices. Whereas in monopolistic competition, even though there are many businesses competing against one another, they produce similar but slightly differentiated products that give them a certain level of power in the market. So, in monopolistic competition the firms to some extent charge higher prices. It is important to understand the various type of market structures as the analysis of the market structure helps a firm in understanding and predicting the market outcomes.
The sustainability of business firms in the long run also depends on its capacity to utilize its resources optimally. If the firms can operate efficiently it can generate more income and avoid facing losses. Microeconomics states that there are three types of efficiency: 1) productive efficiency (also known as ‘technical efficiency’, where a firm produces goods and services with the least amount of resources); 2) allocative efficiency (occurs when consumer preferences are reflected in production and to produce what consumer wants the resources are allocated throughout the economy); 3) dynamic efficiency (occurs when innovation and modern technology are implemented over time). Firms must understand that it depends upon factors like market conditions or market structure to identify if a firm can achieve efficiency or not. For instance, under monopolistic competition, it is challenging to have efficiency as the market price might not be the same as the price of production and consumption. Different marker scenarios affect the level of efficiency as each category has its market characteristics.
Cost analysis is another important concept in microeconomics, which plays a vital role in a business operation, and firms need to analyse the costs. Microeconomics provides numerous theories that explain various conditions of costs, such as short-run and long-run costs, fixed and variable costs, marginal and average costs. These concepts have made it easier for the firm to evaluate the production cost of the firm in a different period. This helps the firm to eliminate or control costs by developing strategies to minimize the cost to achieve higher benefits.
In my opinion another important factor the firms must understand is government intervention in the economy. The government uses various methods such as regulation, taxation or subsidies to address inefficiency in the market. These methods the government uses impacts the firms. For instance, the imposition of taxation and imposition of subsidies impact the price of goods and service produced and sold in the market. Ultimately affecting the demand and supply curve.
Economists depend on theories or models to analyze the real-world issues; the models are generated based on assumptions for economists, individuals and firm to simplify the complex economics issues. These microeconomic models help in understanding the market situation simple and easy, as it might be difficult to analyze and understand the economic situation unless the complexity is reduced. Microeconomic theories and concept are very important in managing a firm, as it helps in understanding the market situations better and guides the managers or business owners to operate their firms, predict the future situations and make decisions.