Microeconomics

Question 1) With examples give 5 reasons why the study of microeconomics is important. Microeconomics is a field of economic study that focuses on how an individual's behaviour and decisions affect the supply and demand for goods and services. For the purpose of microeconomics, the actions of individuals, households and businesses are crucial, unlike the study of macroeconomics, which focuses on national and international economic trends. Despite the differences between the two fields, however, micro-level trends and the study of microeconomics are considered the basis of modern macroeconomics.Macroeconomics is concerned with the big picture, for example, the national economy and gross domestic product. By contrast, microeconomics is concerned with the small picture and focuses on theories of supply and demand. Firstly, microeconomics is very important in business, especially when it comes to a new business. Entrepreneurs create businesses by purchasing and utilizing factors of produ ction. In order to estimate the potential return on investment (ROI) of those factors of production, entrepreneurs must have a basic knowledge of microeconomic concepts such as supply, demand, cost and profit.Without the basics of microeconomics, it is impossible to know how much a particular good can be sold for in a particular area. Furthermore, without microeconomic basics on costs and earnings, it is impossible to estimate ROI, thus will lead to poor financial investments. Microeconomics is very useful in business decision making. It helps business to achieve maximum production with the given amount of resources. Business firms can make decisions in demand analysis, cost analysis and methods of calculating prices.Second, marketing people must have a basic understanding of microeconomics so that they can set prices for products and decide in which markets to sell those products. For example, with an understanding of microeconomics, a computer company marketing manager can advise the CEO to start allowing instalment payments in case of an economic downturn, thus recovering business from customers hit hard by the recession. A marketing manager without a sense of economics might not realize that such options are available. Third, microeconomics is important when it comes to management.Managers must understand the concept of return on investment (ROI) when setting salaries for new hires, as employees are supposed to generate profits for the company. Managers must also have an understanding of microeconomics when making general budget decisions. A project shouldn't be given a budget that exceeds what the project is expected to produce in future earnings. These kinds of decisions are based on the microeconomic concepts of cost, revenue and profit. Fourth, Finance and Accounting also requires the understandings of microeconomics.Finance people probably use microeconomics more than anyone else in business. Financial analysts use microeconomic and macroeconomic theo ries in order to forecast the future value of financial assets. For example, gold, stocks, bonds and other investments. A securities analyst might use microeconomic data to determine the change in income of people in a given country, then use the microeconomic concept of â€Å"price elasticity of demand† for the responsiveness of consumer demand to changes in consumer income and to determine whether the price of a given asset will rise or fall in that country.Accountants use financial ratios that are derived from microeconomics. Lastly, the understanding of microeconomic is needed to provide tools for economic policies. Microeconomic helps to impose tax rates by analyzing the demand and supply factors. It also helps to determine the government policies on the resource allocation and pricing. Government also make policies to control the prices of goods by using the theory of price ceiling and price floor. By understanding microeconomics, we can examine the implications and eff ectiveness of the government policies. Question 2) Define â€Å"ceteris paribus â€Å".Explain why the device of ceteris paribus is so important in economics. Ceteris Paribus is a Latin phrase that translates approximately to â€Å"holding other things constant† and is usually rendered in English as â€Å"all other things being equal†. In Economics the term â€Å"Ceteris Paribus† is used quite often to assume all other factors to remain the same, while analysing the relationship between any two variables. For example, when discussing the laws of supply and demand, one could say that if demand for a given product outweighs supply, ceteris paribus, prices will rise.Here, the use of â€Å"ceteris paribus† is simply saying that as long as all other factors that could affect the outcome such as the existence of a substitute product remain constant, prices will increase in this situation. One of the disciplines in which ceteris paribus are most widely used is economics, in which they are employed to simplify the formulation and description of economic outcomes and the theoretical relationship of cause and effect. When using ceteris paribus in economics, assume all other variables except those under immediate consideration are held constant.For example, it can be predicted that if the price of beef increases, ceteris paribus, the quantity of beef demanded by buyers will decrease. In this example, the clause is used to operationally describe everything surrounding the relationship between both the price and the quantity demanded of an ordinary good. This operational description intentionally ignores both known and unknown factors that may also influence the relationship between price and quantity demanded, and thus to assume ceteris paribus is to assume away any interference with the given example.Such factors that would be intentionally ignored include the relative change in price of substitute goods like the price of beef vs. chicken, t he level of risk dislikes among buyers like the fear of mad cow disease, and the level of overall demand for a good regardless of its current price level like a societal shift toward vegetarianism. If we try to establish the relationship between demand and price, there may be other variables which may also influence demand besides price. The influence of other factors may invalidate the hypothesis that quantity demanded of a commodity is inversely related to its price.If rise in price takes place along with an increasing in income or a change technology, then the effect of price change may not be the same. However, the assumption that the other variables are unchanged will eliminate the interrupting influences of other variables. Ceteris Paribus is important in economics as it is an assumption which we are bound to make when there are complexities in the reality. It is necessary for the sake of convenience. The limitations of human intelligence and capacity compel us to make this as sumption.Besides, without the assumption we cannot reach on economic relations, sequences and conclusions. In fact, there are large numbers of variables interacting simultaneously at a given time. If our analysis has to be accurate we may have to examine two variables at a time which makes it inevitable to assume other variables to remain unchanged. For the ceteris paribus assumption, let’s take for example by assuming an economist examines a model explaining the relationship between the price and quantity purchased of Coca-Cola. The theory is â€Å"if the price increases, then the quantity of Coca-Cola decreases, ceteris paribus. Now assume the process of Coca-Cola was observed to increased one summer and some people actually bought more, not less. Based on this real-world observation, you would declare the theory is wrong but actually the economist responds that this is a reasoning pitfall because the model is valid based on the assumption of ceteris paribus, and your obse rvation gives no reason to reject the model. The reason the model appeared flawed is because another factor which is a sharp rise in the temperature. The rise in temperature caused people to buy more Coca-Cola in spite of its higher price.If the temperature and all other factors were held constant as the price of Coca-Cola rises, then people indeed would buy less Coca-Cola, as the model predicts. Therefore, the assumption that the other variables are unchanged will eliminate the interrupting influences of other variables. As a conclusion, ceteris paribus is important as it enhances our understandings towards the theoretical relationship of cause and effect as we can analyse the relationship between two variable without having any other variable influencing the results.The assumption of Ceteris Paribus eliminates the influence of other factors which may get in the way of establishing a scientific statement regarding the behaviour of economic variables. References Question 1 reference : Importance of microeconomics, http://www. slideshare. net/tribhuwan64/presentation-on-importance-of-microecon omics Importance of microeconomics, http://www. ehow. com/info_8301181_importance-microeconomics-business. html Question 2 reference: Microeconomics for Today, books. google. com. my/books? isbn=0538469447 Basic Tools in Economics, http://wikieducator. org/Basic_Tools_in_Economic_Analysis Microeconomics Question 1) With examples give 5 reasons why the study of microeconomics is important. Microeconomics is a field of economic study that focuses on how an individual's behaviour and decisions affect the supply and demand for goods and services. For the purpose of microeconomics, the actions of individuals, households and businesses are crucial, unlike the study of macroeconomics, which focuses on national and international economic trends. Despite the differences between the two fields, however, micro-level trends and the study of microeconomics are considered the basis of modern macroeconomics.Macroeconomics is concerned with the big picture, for example, the national economy and gross domestic product. By contrast, microeconomics is concerned with the small picture and focuses on theories of supply and demand. Firstly, microeconomics is very important in business, especially when it comes to a new business. Entrepreneurs create businesses by purchasing and utilizing factors of produ ction. In order to estimate the potential return on investment (ROI) of those factors of production, entrepreneurs must have a basic knowledge of microeconomic concepts such as supply, demand, cost and profit.Without the basics of microeconomics, it is impossible to know how much a particular good can be sold for in a particular area. Furthermore, without microeconomic basics on costs and earnings, it is impossible to estimate ROI, thus will lead to poor financial investments. Microeconomics is very useful in business decision making. It helps business to achieve maximum production with the given amount of resources. Business firms can make decisions in demand analysis, cost analysis and methods of calculating prices.Second, marketing people must have a basic understanding of microeconomics so that they can set prices for products and decide in which markets to sell those products. For example, with an understanding of microeconomics, a computer company marketing manager can advise the CEO to start allowing instalment payments in case of an economic downturn, thus recovering business from customers hit hard by the recession. A marketing manager without a sense of economics might not realize that such options are available. Third, microeconomics is important when it comes to management.Managers must understand the concept of return on investment (ROI) when setting salaries for new hires, as employees are supposed to generate profits for the company. Managers must also have an understanding of microeconomics when making general budget decisions. A project shouldn't be given a budget that exceeds what the project is expected to produce in future earnings. These kinds of decisions are based on the microeconomic concepts of cost, revenue and profit. Fourth, Finance and Accounting also requires the understandings of microeconomics.Finance people probably use microeconomics more than anyone else in business. Financial analysts use microeconomic and macroeconomic theo ries in order to forecast the future value of financial assets. For example, gold, stocks, bonds and other investments. A securities analyst might use microeconomic data to determine the change in income of people in a given country, then use the microeconomic concept of â€Å"price elasticity of demand† for the responsiveness of consumer demand to changes in consumer income and to determine whether the price of a given asset will rise or fall in that country.Accountants use financial ratios that are derived from microeconomics. Lastly, the understanding of microeconomic is needed to provide tools for economic policies. Microeconomic helps to impose tax rates by analyzing the demand and supply factors. It also helps to determine the government policies on the resource allocation and pricing. Government also make policies to control the prices of goods by using the theory of price ceiling and price floor. By understanding microeconomics, we can examine the implications and eff ectiveness of the government policies. Question 2) Define â€Å"ceteris paribus â€Å".Explain why the device of ceteris paribus is so important in economics. Ceteris Paribus is a Latin phrase that translates approximately to â€Å"holding other things constant† and is usually rendered in English as â€Å"all other things being equal†. In Economics the term â€Å"Ceteris Paribus† is used quite often to assume all other factors to remain the same, while analysing the relationship between any two variables. For example, when discussing the laws of supply and demand, one could say that if demand for a given product outweighs supply, ceteris paribus, prices will rise.Here, the use of â€Å"ceteris paribus† is simply saying that as long as all other factors that could affect the outcome such as the existence of a substitute product remain constant, prices will increase in this situation. One of the disciplines in which ceteris paribus are most widely used is economics, in which they are employed to simplify the formulation and description of economic outcomes and the theoretical relationship of cause and effect. When using ceteris paribus in economics, assume all other variables except those under immediate consideration are held constant.For example, it can be predicted that if the price of beef increases, ceteris paribus, the quantity of beef demanded by buyers will decrease. In this example, the clause is used to operationally describe everything surrounding the relationship between both the price and the quantity demanded of an ordinary good. This operational description intentionally ignores both known and unknown factors that may also influence the relationship between price and quantity demanded, and thus to assume ceteris paribus is to assume away any interference with the given example.Such factors that would be intentionally ignored include the relative change in price of substitute goods like the price of beef vs. chicken, t he level of risk dislikes among buyers like the fear of mad cow disease, and the level of overall demand for a good regardless of its current price level like a societal shift toward vegetarianism. If we try to establish the relationship between demand and price, there may be other variables which may also influence demand besides price. The influence of other factors may invalidate the hypothesis that quantity demanded of a commodity is inversely related to its price.If rise in price takes place along with an increasing in income or a change technology, then the effect of price change may not be the same. However, the assumption that the other variables are unchanged will eliminate the interrupting influences of other variables. Ceteris Paribus is important in economics as it is an assumption which we are bound to make when there are complexities in the reality. It is necessary for the sake of convenience. The limitations of human intelligence and capacity compel us to make this as sumption.Besides, without the assumption we cannot reach on economic relations, sequences and conclusions. In fact, there are large numbers of variables interacting simultaneously at a given time. If our analysis has to be accurate we may have to examine two variables at a time which makes it inevitable to assume other variables to remain unchanged. For the ceteris paribus assumption, let’s take for example by assuming an economist examines a model explaining the relationship between the price and quantity purchased of Coca-Cola. The theory is â€Å"if the price increases, then the quantity of Coca-Cola decreases, ceteris paribus. Now assume the process of Coca-Cola was observed to increased one summer and some people actually bought more, not less. Based on this real-world observation, you would declare the theory is wrong but actually the economist responds that this is a reasoning pitfall because the model is valid based on the assumption of ceteris paribus, and your obse rvation gives no reason to reject the model. The reason the model appeared flawed is because another factor which is a sharp rise in the temperature. The rise in temperature caused people to buy more Coca-Cola in spite of its higher price.If the temperature and all other factors were held constant as the price of Coca-Cola rises, then people indeed would buy less Coca-Cola, as the model predicts. Therefore, the assumption that the other variables are unchanged will eliminate the interrupting influences of other variables. As a conclusion, ceteris paribus is important as it enhances our understandings towards the theoretical relationship of cause and effect as we can analyse the relationship between two variable without having any other variable influencing the results.The assumption of Ceteris Paribus eliminates the influence of other factors which may get in the way of establishing a scientific statement regarding the behaviour of economic variables. References Question 1 reference : Importance of microeconomics, http://www. slideshare. net/tribhuwan64/presentation-on-importance-of-microecon omics Importance of microeconomics, http://www. ehow. com/info_8301181_importance-microeconomics-business. html Question 2 reference: Microeconomics for Today, books. google. com. my/books? isbn=0538469447 Basic Tools in Economics, http://wikieducator. org/Basic_Tools_in_Economic_Analysis