Saturday, 11 March 2017

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Micro Economics explained – Concept of Price, Demand and Supply

In the last article we left you with some of the key concepts and questions that why we actually want to study the decision process. The reason behind this study is we know we don’t have all the money and time in the world to purchase and do everything. Microeconomics examines how these decisions and behavior affect the supply and demand of goods and services which in turn determines the prices we pay. These prices in turn determines the quantity of good supplied by businesses and the quantity of goods demanded by consumers.
It exposes the issues such as how family reaches to decisions of what to buy and how much to save. For example – it answers questions to the industry say Samsung- how many mobile phones, television sets or refrigerators they need to make and at what price they need to sell.

How the Prices of a good are determined?

The price determination is also affected by the competition in the market. In a monopolistic market i.e. where large number of buyers and sellers exists who sell similar products differentiated by the quality, their branding and marketing techniques, the prices of goods are highly influenced by the prices of their competitors.

For example, reebok and Adidas, both being a highly reputed shoe brand are top competitors. The price of one company affects the prices of another. This is how competition also affects the prices of goods and services in an economy. Microeconomics should not be confused with macroeconomics.
In brief, macroeconomics is a wider study of an economy. 
It is the study of major components of an economy like unemployment, national income accounting, money and banking etc. Microeconomics majorly revolves around two terms that defines price.

Tell you What – Demand and Supply ; you must know them now

Price is determined in an economy with the help of market forces i.e. demand and supply. Demand is done by consumers. Desire, want, need and demand are often used as synonyms, but actually they all are different from each other. Desire means willingness to buy the product. But to be called demand, four conditions needs to be fulfilled. And, they are
1.     Willingness to buy the product
2.     Ability to buy ( Purchasing power/money)
3.     Availability of commodity
4.     Willingness to spend.
For example: Dairy products are daily required commodities for all which means People are willing to buy them, say milk. If milk is available in the market and people can afford it and they actually want to purchase it, then such product i.e. milk (here) is a demanded product.

We shall discuss demand in detail in next article.

How a price of the product is determined, based on the Supply. Complete Explanation with Example.

Moving onto supply, Supply is that desired quantity of commodity which a producer is willing to sale in the market at a particular price period of time. Supply is always done by producers. It is always expressed in terms of price and is expressed for a particular period of time, say month or a year.
For example: LG company is willing to sell coolers in summer season at an increased rate. The prices of such coolers will vary time to time in a year. They would be sold at a high price in summer season but comparatively at a lower price in winter season. Such sell of coolers at a particular period of time is called supply of a commodity.

Price in market is determined by the market forces i.e. demand and supply.
For example: Considering demand in price determination & keeping other factors (influencing price i.e. preferences of consumer, seasons etc.) constant,
If the price of a commodity increases its demand shall decrease. There’s an inverse (indirect) relationship between price and demand. For example at a price of Rs. 50 per kg. , 90k Quintals of rice are sold in a year. If the price of rice increases up to Rs. 100 per kg, demand for rice decreases up to 50k quintals, as people shall reduce or limit their consumption of rice.

Considering Supply in price determination & keeping other factors constant, if the price of a commodity increases, the supply of the commodity also increases. There is direct relationship between supply and price of a commodity. For example: onions are sold at Rs.50 per kg and 100k quintals are supplied by producers. If the price of onions fall to Rs. 20 per kg, producers reduce their supply and will supply less onions in market till the time price again rises up. That means when price increases, supply also increases and vice versa. Such price determination and concepts related to consumer behavior are covered under micro economics Which we shall discuss in our later articles!


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