Before I discuss about my main topic, first, let me define what is microeconomics. Microeconomics is one of the main areas of the social science of economics. It considers the behaviour of consumers, firms and industries. It studies how they make decisions to allocate limited resources in the marketplace, whereby goods or services are being bought and sold. It examines how these decisions and behaviours affect the demand and supply for the goods and services which determines the prices, and how the prices in turn determine the demand and supply of goods and services. (Science Daily, 1995). Why do tickets to the best concerts cost so much? How does the threat of global warming affect real estate prices in coastal areas? Why do women end up doing most of the housework? Why do senior citizens get discounts on public transit systems? All these questions are generally regarded as microeconomics because they focus on individual units or markets in the economy. Next, I’ll discuss about some of the microeconomics concept that applied in our real life situations.

 

Scarcity

First, I’m going to explain about scarcity. Scarcity is the problem that faced by all societies. Scarcity occurs when there is unlimited wants but limited resources. In economics, scarcity forces people to make choices, as everyone cannot have everything. Without scarcity, an economy doesn’t exist. According to the article that I found online, Goalmari - Bangladesh's story of water scarcity, the author stated that nearly 20,000 villagers in Goalmari, Bangladesh are facing a scarcity of pure drinking water. This is because the river near the village is polluted by high levels of arsenic as thousands of villagers are rely on this river for their livelihood. If they’re continuing drinking this highly polluted water, what could have been a lifeline for the villagers is actually slowly killing them. Therefore, they have to travel long distance in order to get clean drinking water. (Pereira, 2013). From this article, we can consider the pure drinking water as scarce. This is because the river near the village is the only water resources (limited resources) for the Goalmari’s villagers and they are more demand for the pure water as the river is polluted. Therefore, they have to make choices between the pure and dirty water which has a serious concern with their health and their lives.

Demand and supply

Demand and supply is the basic economic concept that occurs in our lives. Demand refers to the amount of goods or services that consumers are willing and able to buy at a given price in a certain period. (Riley, 2009). The law of demand states that the quantity demanded and the price of goods or services are inversely related, as all others factors remain constant. Supply is the amount of goods or services that is available in a market for purchase. The law of supply states that there is a positive relationship between the quantity supplied and the price of goods or services, as all others factors remain constant. Based on the article, Guns and Ammo, Supply and Demand (and why price gouging is good), the author stated that the price of ammo, if a box of 50 rounds of 9mm sells for $12 then more people will buy it. If it sells for $70 then less people will buy it. (Amselle, 2013). This situation can be explained through the graph below.

 

For the consumers, the graph shows that the demand curve is downward sloping. Let’s say if the price of ammo is P1, the quantity demanded is Q1, therefore it illustrate that more people will buy it. If the price of ammo increases to P2, the quantity demanded decreases from Q1 to Q2, therefore it shows that less people will buy it. People will buy when the price of the product is lower rather than the high prices within the same product. Another example, more people will go to shopping mall when there is a big sale or discount rather than the usual time. So, why not we choose to buy at low price in order to reduce our expenses?

 

For the suppliers, the graph above shows that the supply curve is upward sloping. Let’s say when the price of ammo is P1, the quantity supplied is Q1. When the price of ammo increases to P2, the quantity supplied increases from Q1 to Q2. Based on this graph, it is clearly illustrate that the firm will produce more ammo when the price increases in order to gain more revenue. For example, if I run a company, I will definitely choose to produce more products at a high price to gain more profit. As a result, it can be said that demand and supply is basically very common in our daily lives.

 

 

Price elasticity

What is price elasticity? Price elasticity describes a product’s responsiveness to the changes in price. The price elasticity of demand measures this change based on the adjustments to the price of the product. When the demand of goods is elastic, a decrease in price will increase the quantity demanded for the product. On the other hand, a price increase of an elastic product will result in decreased quantity demanded for the product. (Investopedia, 1999). For example, when the price of the branded goods doesn’t change, people will not buy it. Unless the price of branded goods decreases, people will buy it. Therefore, people are very sensitive to the price change in branded goods. When a price change has little effect on the supply and demand of a good or service, it is considered as inelastic. Based on the article that I found online, Japanese yen for smoking tested by 33% cigarette price rise, the author reported that the biggest ever increase in the tax on Japan's cigarettes is designed to raise extra revenue to pay for rising healthcare costs in a rapidly ageing society, but is also an indication that Japan is attempting to shed its image as a haven for nicotine addicts. Although consumption has fallen every year since 1999, Japan still has one of the highest smoking rates in the industrialized world. Furthermore, the author also stated, "I don't think this price hike will prompt many people to give up, “They’ll just save on food and drink so they can afford cigarettes, he said. (Justin, 2010). From this article, we can consider cigarette as inelastic demand. This situation can be explained through the graph below.

 

Let’s say when the price of cigarette increases from P1 to P2, the quantity demanded decreases from Q1 to Q2. It shows that the gap between Q1 and Q2 is very small. Even the price of the cigarette increases dramatically, the quantity demanded only decreases at certain quantity, not much. This means the price changes in cigarette only have little effect on the quantity that people buy. People will pay any price to obtain it. Therefore, they are less sensitive to the price change. Another example, gasoline is considered as inelastic. This is because the availability of substitutes for gasoline is very less although diesel oil is available but most of the vehicles are using gasoline. It can be said that gasoline is a necessity for the normal car, people still will use and pay for it even the price had increased.

 

In conclusion, all these microeconomics concepts can be applied in our daily lives. Microeconomics is important because it studies behaviour of individual consumer or producer in a particular situation, helps in proper allocation and utilization of resources to produce various types of goods and services, decides prices of various goods and services on the basis of 'Demand-Supply Analysis', helps the government in fixing the tax rate and the type of tax as well as the amount of tax to be charged to the buyer and the seller and much more. (Akrani, 2010).

Reference List

Akrani, G. (2010) Microeconomics - Meaning Scope Features Uses Limitations. 11 October. Available from: http://kalyan-city.blogspot.com/2010/11/micro-economics-meaning-scope-features.html [Accessed 4 Jun 2013].

 

Amselle, Jorge. (2013) Guns and Ammo, Supply and Demand (and why price gouging is good). 22 April. Available from: http://dailycaller.com/2013/04/22/guns-and-ammo-supply-and-demand-and-why-price-gouging-is-good/#ixzz2UwJKRewg [Accessed 4 Jun 2013].

 

Investopedia (1999) Price Elasticity Of Demand. Available from:

http://www.investopedia.com/terms/p/priceelasticity.asp[Accessed 4 Jun 2013].

 

Justin, M. (2010) Japanese yen for smoking tested by 33% cigarette price rise. 6 October. Available from: http://www.guardian.co.uk/world/2010/oct/06/japan-cigarette-tax-increase.[Accessed 4 Jun 2013].

 

Pereira, N. (2013) Goalmari - Bangladesh's story of water scarcity. 6 Jun. Available from:

http://articles.timesofindia.indiatimes.com/2013-06 06/ahmedabad/39787284_1_munem-wasif-drinking-water-water-scarcity  [Accessed 4 Jun 2013].

 

Riley, J. (2009) Q&A - What is market demand? 1 May. Available from:

http://www.tutor2u.net/blog/index.php/business-studies/comments/what-is-market-demand[Accessed 4 Jun 2013].

 

Science Daily (1995) Microeconomics. Available from:

http://www.sciencedaily.com/articles/m/microeconomics.htm [Accessed 4 Jun 2013].