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Microeconomics is the part of economics that studies the reactions of individuals and companies when making decisions depending on scarce resources and also studies the interactions among these individuals and firms. Economics is found everywhere, this is why it is so important to not only study economics but also understand it and relate it to events that occur around us. In this essay, I will be showing my understanding of microeconomics by associating things we studied in class to everyday life.
Firstly, market surplus is an excess supply of a commodity that producers aren’t able to sell. It occurs when supply is higher than demand which causes prices to be above equilibrium. In September, China’s exports dropped sharply by 16% due to the trade war between the US and China, the total trade surplus of China was $34.84 billion in September only. During market surplus, sellers increase sales by constantly decreasing price which increases quantity demanded until price reaches equilibrium. If China wants to go reach the equilibrium price, it should decrease its prices which will increase sales and eventually resolve the market surplus (Lee, 2019).
Secondly, a shortage is a situation where the amount of something needed is not sufficient. It occurs when supply is lower than demand which causes prices to be below equilibrium. Nowadays, there are 121 medicine shortages that occur at least 50 times per year as stated by 70% of hospital pharmacists. Without these medicinal drugs, treatments may not be as beneficial. These shortages occur due to seasonal changes and disease outbreaks like flu season. Since medicine is very inelastic people will continue buying it, this will cause prices to rise since the price is lower than equilibrium (Reiner, 2019).
Thirdly, a surplus is a situation where there is an excess of supply of a commodity. It occurs when supply is higher than demand which causes prices to be above equilibrium. The diamond industry is now going through a very rough time, there is a surplus of diamonds and stores have been burdened with inventory that is taking too long to sell. This surplus is caused by huge amounts of synthetic and lab-grown diamonds being imported from India which have become a huge threat since they can’t be differentiated from real diamonds. Ben Davis, an analyst, states that “the next months are still likely to be difficult for the industry”. Because diamonds are elastic, people will stop buying them, this will cause prices to decrease since the price is higher than equilibrium (Bloomberg, 2019).
Fourthly, price floor is a legal minimum price added by the government. Governments set price floors to stop prices from being too low. The Philippine government decided to set a price floor since there were too many cheap rice imports which decreased profit for local producers, imported rice can cost as low as $0.14 per kilo while the cost of producing for local farmers is $0.24. Having a minimum price floor will encourage people to purchase from local producers rather than imported rice. The price floor will be below equilibrium which means that it will have no effect on the market since it is not binding. In summary, by setting a price floor, revenue will be generated without causing a surplus (Rivas, 2019).
Lastly, tax is a compulsory contribution set by the government added to the costs of some commodities or on worker’s income. Due to the recent economic dip, the French government set a 3% tax on Amazon sellers based in France which generated in €25 million euros yearly. The fast-growing use of Amazon’s online retail market and people’s dependence on online shopping, allows sellers to have a higher elasticity than buyers. This results in sellers adjusting the 3% tax to customers especially since there aren't that many alternatives to the choice and convenience provided by Amazon in France. This means that the tax burden will be on buyers rather than sellers, this causes the demand curve to shift to the left (Chandler, 2019).
In conclusion, taking this microeconomics course helped me recognize how connected economics is to our daily lives. It also helped me understand the reasons for implementing laws in the UAE such as VAT and the effect it has on our economy. Moreover, understanding microeconomics helped me comprehend my finance major more since I can relate things, I studied, from microeconomics to finance and it gave me a better perspective of events occurring in the UAE and around the globe.
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