Microeconomics
Market
A market is the process of interaction between the buyers and sellers of a commodity. Due to scarcity of resources, demand and supply forces establish a balance, which translates to the market value or price for a particular product. However, other forces may affect the market value of products. Economists use analytical theories and models known as structures to make assumptions on the forces that influence the market. Externalities refer to other forces other than demand and supply that may influence market price. For demand and supply forces to be the only forces determining the price, it is assumed that there is a willing buyer and a willing seller. The seller is motivated by profits while the buyer has a demand for the product. Costs in this case refer to the production and supply inputs and therefore marginal cost is the cost incurred to produce one additional output. Marginal revenue on the other hand, is the revenue obtained from adding one unit of out put. The concept of marginal and average costs, revenue, profit etc applies relative to time. This refers to market period of which there are no changes in supply, the short run and the long run of which changes can occur in the market (Kreps, 1990).
Factors of production
All economies have limited factors of production that is resources, labor and capital. Economies tend to utilize these factors in an efficient way to maximize on investments. Economic theories are formulated by analyzing the correlation between economic variables. Opportunity cost is the benefit that would have been derived from an alternative. A graph of production possibilities frontiers is applied to explain the concept of opportunity cost, employment, efficiency and economic growth rate. This is especially important considering that economies efficiently employ the factors of production due to scarcity of resources. More over, firms and consumers optimize on efficiency in terms of demand and supply, this builds the structure for preferences and production functions that translates to the social preference curve.
Perfect and imperfect market structures
Generally, there are two market structures, perfect and imperfect market structures. For a market to be described as perfect the buyers must be many and able to make independent decisions, there should be perfect information on products in the market, free entry, exit, and many independent suppliers. In addition, the benefits and costs of trade are born by the buyers and suppliers only. Most markets are imperfect for they do not exhibit one or several of these characteristics. In perfect markets buyers tastes and preferences differ depending on cost-benefit analysis. Graphically, the vertical axis displays the total value of benefits while the horizontal axis represents the total cost. However, total benefits rises at a diminishing rate due to diminishing marginal benefits. Diminishing marginal utility therefore sets the market price by applying the laws of demand and supply. Buyers buy more of a product when its price is lower other factors remaining constant, which represents the demand curve. On the other hand, other factors remaining constant an increase in price would lead to an increase in profit maximization level, which is the supply curve. Imperfect markets describe markets characterized by externalities or spill overs. These externalities may have positive or negative impacts on the market.
The price mechanism
Under competitive environment, there is market equilibrium between the quantity demanded by the buyer, the quantity supplied and the price function. It is important to note that the level of demand is affected by numerous factors like tastes and preferences, income and prices. These factors may cause an increase in demand, which further leads to increase in quantity demanded. A shift in demand refers to such changes in equilibrium price and quantity. A decrease in demand would cause the opposite effects on the demand curve. It is the same thing for the supply curve. Better production technologies or favorable changes in weather for agricultural products may lead to an increase in supply. This leads to an increase in quantity supplied and reduced prices, which constitutes a shift in supply curve.
Price controls
In the public sector, where the government has influence, price mechanism does not work. It is very clear that government intervention is critical in stabilizing markets but this does not mean going to the level of fixing prices. By fixing prices, the government creates a good environment for resource misallocation, which may lead to poor standards of living (Landsburg, 2001).The government exercises huge influence especially in the labor market where there are regulations on the minimum wages for cadres of workers. This minimum wage is made to support the working poor. In the rent control programs, the government has set a price ceiling to make housing more affordable for low-income families. These interventions have not helped matters yet and therefore it is important to let the market set the price.