Microeconomics - Development aspects

CONTENTS

Chapter One
1.0. Introduction
1.1. Objectives of the Study

Chapter Two
2.0. Definitions
2.1. Microeconomics
2.2. Production
2.2.1. Scarcity of factors of production (Resources)

Chapter Three
Exchange System
3.1. Relative and nominal prices
3.2. Demand theory
3.3. Supply theory
3.4. Equilibrium position in the market
3.5. Price ceiling and price floor
3.6. International effects

Chapter Four
Market coordination
4.1. Markets and the three fundamental questions
4.2. Economic and technical efficiency
4.3. Consumer equilibrium
4.4. The role of Price Mechanism

Chapter Five
Market failure
5.1. Imperfect and inadequate information
5.2. Externalities
5.3. Inequality in society

Chapter Six
The Decision of the firm
6.1. Profit maximization
6.2. Total Revenue, Marginal Revenue and Marginal cost of a firm
6.3. Profit maximization under perfect competition
6.4. Profit maximization under Monopoly market
6.4.1. Sources of Monopoly
6.4.2. Price discrimination
6.5. Other market structures
6.6. Employment and output
6.7. Regulation
6.8. Resource markets
6.9. Natural resource markets and environmental policy
6.10. Allocation of resources and environmental problems
6.11. Economics of the family
6.11.1. Subsistence Production
6.11.2. The market (Monetary production)
6.11.3. Agricultural price fluctuations
6.12. Forms of Business Organizations

Chapter Seven

Recommendations

Chapter Eight

Conclusion

References

Chapter One.

1.0 Introduction

Human beings have wants and they are naturally not self sufficient. They therefore have to produce and exchange what they do not have with those who have what they want. Right decisions have to be made in regard to the quantities to produce and the prices to charge by firms. This is done through the demand and supply theory. Supply and demand in most economies face a lot of challenges. Supply challenges range from small firms with structural supply rigidities to huge firms that act as monopolists and cartels that charge exploitative prices on the consumers. These challenges affect the trading position of several economies in the international trade. Demand is rapidly increasing due to the rapid world increase in population. This paper will cover analysis of decisions of a firm, supply and demand of a commodity, price of a commodity and how the small economic groups and individuals affect the mentioned variables

1.1. Objectives of the study.

The course will;

- Introduce students to important principles of microeconomics so that they are able to take important decisions in life.
- Enable students acquire principles that enable them to analyze day today problems.

Chapter Two

Definitions.

2.1.Microeconomics.

Microeconomics involves the study of economic actions and behavior of individuals and small groups such as consumers, producers as well as small economic units such as resource owners and business firms . It involves the analysis of the decisions made by individuals consumers and firms. It mainly deals with the analysis of price determination which is an emphasis of the market arrangement. Maunder e tal (1996:14) explains that macroeconomics is the study of individual decision making by both individuals and firms.

Economics involves the study of how people and societies use scarce resources to satisfy their wants or needs out of scarce resources. Scarce resources include raw materials, labor, capital energy which aid production and finally fulfills the purpose of satisfying human wants. Society and individual wants include education, medical care, clean environment, and therefore a dire need to have resources to achieve these goals, which unfortunately are scarce. Maunder, e tal (1996 ), defines economics as the social science of studying human behavior and, in particular the way in which individuals and societies choose among alternative uses of scarce resources to satisfy wants. Scarce resources and unlimited wants lead man to resort to the basic principles of economics that include scarcity, choice and opportunity cost.

Scarcity implies that that there is always a fixed stock of resources that are relatively not enough to satisfy man’s needs.

Choice refers to the ability of man to choose from the many alternatives what is best for him. Choice helps individuals or firms to take the right decision while it helps the government to make the appropriate decision and goes on to implement it.

Opportunity cost refers to the alternative sacrificed whenever choice is made. The concept of opportunity cost is important since the resources are not enough to satisfy man’s wants at a particular time. During production and consumption, sacrifices are made so that alternative possibilities are foregone because society is faced with a challenge of scarce resources. Opportunity cost is progressively used in the process of exchange where maximum benefit is given up to physical resources such as land, labor and capital.

Scarcity is argued by economists to be a fundamental economic problem. To satisfy individual and society wants implies that they have to choose among alternatives available in order to overcome the fundamental economic problem of scarcity. Economics therefore entails of how choices are made. In line with this Gregory (2012, p 7) says that rational people systematically and purposefully do the best they can to achieve their objectives given the available opportunities. The people across the globe are struggling to work to be better out of the opportunities available to them. In our communities the majority of the people are now awake and therefore the importance of hard work towards poverty eradication and improvement of the welfare.

An economic good is always scarce. The cost of acquiring an economic good is zero. It provides satisfaction relatively scarce and marketable.

A free good exists in natural abundance .Quantity demanded for it is less than supply at zero prices. Economists argue that there are relatively few, if any.

2.2.Production.

Production is man’s endeavor to use the scarce available resources so as to achieve satisfaction out of them. (Ocan, 2006: 73) defines production as any activity aimed at bringing about a physical change in a good to make it more satisfying and useful. Through the production process, wealth is created and inputs are changed into goods and services meant for human satisfaction. Production entails direct and indirect production. Under direct production man engages in production in a bid to satisfy one’s own satisfaction. Cases are of this production are observed in subsistence production where an individual produces his crops for home consumption. Under indirect production, firms and individuals engage in production for exchange or sale and money is widely used as a medium of exchange. Therefore to attain maximum benefit, specialization and division of labor is necessary. Specialization and division of labor allows everybody to do what he can at his best since the activity is divided into a series of repetitive tasks and each individual does one task.

There are three levels of production and these include; primary production, secondary production and tertiary production.

Primary production involves man’s exploration in the environment to exploit resources aimed at aiding the production process. It entails activities such as hunting, fishing, mining, farming, oil drilling and other extractive industries.

Secondary production involves converting the raw materials into the finished products. It is a stage where value is added to the primary products. Activities involved include textiles, food processing, knitting and embroidery, construction, both on large scale and small scale.

Tertiary production is the stage that increases value on the final product as well as moving commodities from the firms to the final consumers. It is a service provision stage where the goods and services are made available to the consumers.

The overall objective of production activity is to satisfy man’s wants. Hard working communities have moved from strength to strength in achieving wealth accumulation and therefore a high standard of living among the respective populations is evidenced. On the hand communities where there is a poor attitude to work, their production levels are low and this seems to be one of the major factors why some areas are still under abject poverty.

2.2.1.Scarcity of factors of production (Resources)

Economic resources are goods that are used to produce other goods or services. These goods are inputs or factors of production. These include land, labor, capital, and entrepreneurship.

Land. Land refers to all natural resources. These natural resources include the gifts of nature which include soil, water, air, minerals, among others. These resources are normally referred to as free gifts of nature because they are natural endowments. Land has a unique characteristic because it is where all production takes place. Land is fixed in supply and subject to the law of diminishing returns.

Labour. Human beings provide labor in terms of physical and intellectual services in the process of production. For production to take place, human resource is needed in labor units employed to the production activity for example drivers, singers, teachers. Labor is a resource that needs to be well managed to maximize returns from it. These include provision of education to improve labor productivity. Also important is health services to have health labor that is able to offer its maximum man hours on the job. Human resource management is vital for human resource planning, training, induction, coaching counseling, supervision, so that units of labor employed are properly utilized.

Capital. Capital is the physical assets that are used in the creation of more goods and services. Capital can be categorized as real capital and money capital. Examples of real capital includes infrastructure, machines, factories, while money capital includes paper notes, coins, stocks, bonds, and other financial assets. They are capable of producing other goods and services.

Entrepreneur. An entrepreneur organizes the production process by planning and organizing factors as well as bearing risk. The entrepreneur has the role of managing and undertaking product risk during the course of production and providing an environment for other factors to operate. Dumba, (2004, p 7), stresses that an entrepreneur has the ability to understand what the market wants which improves his ability to innovate. In addition it is important to note that innovation plays a major role in society development.

In the school environment there are many resources under our jurisdiction. These include scholastic materials, human resource that includes teaching and non- teaching staff, students and physical infrastructure. It is important to note that all these resources need to be taken care of carefully because they each contribute significantly towards the school and national goals of education. Staff needs motivation and supervision, students need care, counseling and guidance.

Chapter Three.

Exchange system.

A barter system is a market system that involves direct exchange of physical goods and services. Much as the barter system may be an effective system in a simple economy, it does not function well in a complex economy where there are multiple production systems. The major loophole associated with a barter system is that any trade requires a double coincidence of wants. This type of trade can only take place if each person wants what the other person is willing to trade and is willing to give up what the other person wants. This has therefore called for use of money system for easy facilitation of trade in almost all societies though with different magnitudes. In some communities of Uganda some people can even work for food. A day’s work on someone’s farm is equated to some amount of food at the end of the day. Dilts, (2004, p 13), identifies characteristics of the market system that are essential in the allocation of resources which include comparative advantage, division of labor, specialization and capital goods. It is however important that communities where resources are not properly utilized, it is not easy to determine their comparative advantage. Productivity is generally not well developed to induce proper functioning of markets.

3.1. Relative and nominal prices.

Price shows the value of a commodity at a particular time. This can be reflected in relative terms for instance how expensive this good is by the units of it in terms of units of another. This reflects the opportunity cost of acquiring a good or service in either barter or monetary systems of exchange. This shows how goods and services are either expensive or cheap in relation to others. For a barter system, the relative price means the trading ratio between any two goods or services. For example if one 28 gauge iron sheet is traded for two 32 gauge iron sheets, the relative price of a 28 gauge is two 32 gauge iron sheets.

In a market economy, there are competitive market prices of that are determined by activities of buyers and sellers through the interaction of demand and supply.

3.2. Demand theory.

Demand is the willingness of the consumer to buy a certain quality and quantity of goods at a certain price. Demand is greatly affected by the purchasing power. Lack of purchasing power will lead to no effective demand. A population with low purchasing power especially in developing countries has low effective demand.

For a normal good, the higher the price, the less quantities will be bought and the lower the price the more quantities of a commodity will be bought. Quantities purchased by all consumers can be summed up to give market demand. Jhingan, (2006, p 136), stresses that for a commodity to have demand, consumers must have the willingness to buy that commodity, which is related to per unit time. This implies that demand is measurable within a given time after which it changes.

A demand curve is an important instrument to show the price-quantity relationship as shown in the diagram below.

illustration not visible in this excerpt

The quantity of a good is inversely related to the price of a good, keeping other factors constant. The law of demand is derived from this inverse relationship. The demand curve shown has a negative gradient a reflection of the inverse relationship between the price of a good and quantity demanded in a given time. When prices go up quantity demanded reduces and when prices go down, quantity demanded increases, ceteris paribus. Other determinants of demand other than price include prices of related goods, level of people’s income, the number of consumers, tastes and preferences, expectations of future prices among other factors. The increasing world population for instance has led to increased demand for food, and other basics leading to inflation, hunger and poverty in some communities.

Taking an example of complementary goods, these goods have a characteristic of being bought and used together. For example milk used to make tea will require the household to demand bread as well. An increase in demand for one will lead to the demand for the demand for the other. For substitutes, an increase in the price of X will lead to decrease its demand and an increase in quantity for commodity Y since they are more or less alternative to each other.

Demand for food is increasing at an alarming rate. This is as a result of an increasing global population. Demand for food leads to increased consumption agricultural products. According to Malthusian theory of population, total demand for food is directly proportional to human numbers. It states that population grows exponentially to the extent that resources will be unable to support the available population. This is in agreement of the present situation where there is prevalent hunger in some areas. It is estimated that over 700 million people in the developing world do not access sufficient food, a condition that subjects them to poor health.

There are many determinants of demand which include the following;

a) The relative prices of the goods available.

The consumer will demand more of a commodity whose price is relatively lower. The lower prices will attract the consumers while high prices will scare away the customers according to the law of demand. For substitutes like beans and peas, an increase in the price of beans will cause consumers to switch to peas, ceteris paribus, and a decrease in the price of beans will make consumers demand more of the beans. While for the complements like fuel and car, an increase in the price of car will negatively affect the quantity demanded of fuel because there will be few cars lining up on the fuel station for fuel, ceteris paribus.

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