Introduction to Microeconomics- a General Overview of Supply and Demand

1. 1 Introduction to Microeconomics- a General Overview of Supply and Demand As a study branch of economics, Microeconomics is mainly concerned with decision-making by particular individual agents like firms and consumers within the larger group. From a financial point-of-view, microeconomics focuses on distribution of goods, income, products, and services. This directly impacts upon financial markets along with the overall value of any specific resource at any particular point of time. To have a brief understanding of microeconomics, it is essential to understand two integral concepts of microeconomics at first- supply and demand from where comes the foundational law of supply and demand. Fig 1: Microeconomics Overview General Concept of Supply and Demand Supply and demand are the most analysed concepts of economic expressions. Demand is the rate at which consumers want to buy a commodity, while the ability to supply commodity is determinant of seller’s actions. There are mainly two factors of demand: a) taste and b) ability to pay. Taste is the desire for a commodity and determines the readiness to purchase the commodity at a certain price. Purchasing ability means that an individual must have sufficient wealth or income to buy a commodity at a specific price.

2. 2 Law of Supply and Demand According to the basic proposition of law of supply and demand, as price of a commodity goes up, the quantity of that commodity demanded by consumers goes down. Similarly, when price falls down, the quantity demanded goes up. When prices increase, sellers’ willingness and ability to offer goods increases while buyers’ willingness and ability to buy goods decreases. This means, sellers and buyers react in opposite ways to a change of price. Fig 2: Law of Supply and Demand Economists believe that both supply and demand are determined by the price. Equilibrium economy only defines the intersection of the curves of supply and demand, not how this intersection is achieved. System dynamists believe that the availability of a product influences market prices and demand instead of its production rate. Opportunity Cost: Another factor must be taken into account when assessing the prices of an undefined market. This factor is named cost opportunity. Opportunity costs are the relative loss of opportunity that one faces when deciding to invest time and money on a particular commodity. This refers to the value of the next best alternative choice that one can make instead of the actual choice. The concept of “value” is rather arbitrary, because in economics it is not measured only through money. Value can also be measured through one’s pleasure or benefit by choosing one commodity over another. Brainware University