How does Microeconomics Affect Business
Microeconomics is essentially the study of how the decisions of individuals and businesses affect the economy. When people place a demand on a product, businesses usually respond by adjusting supply of a good or service. Given that resources are scarce, it is important to make use of microeconomics to make sound business decisions.
In this OneHowTo article we go into detail on how does microeconomics affect business.
The Law of Demand and Supply
Businesses utilize microeconomic principles in order to study the behavioral patterns of their consumers. This field of economics tries to understand how at an individual level, individuals and consumers respond to the law of demand and supply. When all things remain equal, an increase in demand will be followed by an increase in supply. However, economics is an intricate field and it is essential to apply microeconomic principles to secure a success in business and to generate a profit.
Starting a Business
When you are first starting in business it is fundamental to carry extensive research into the industry of your interest. You may want to know where is customer demand so that you can provide and develop the services that would match the needs of your target market. Spending and investing in research; as well as in promotional material can help you achieve a competitive advantage to attract customers. Given that resources are scarce you want consumers to choose your product or service over the competition.
Cost of Goods and Services
When offering is decided it must be produced in a way that it minimizes costs and maximizes profits. In microeconomics, businesses operate at the maximum level of efficiency, which means that production decisions are based on how much output can be maximized without incurring in added costs. For instance, businesses willing to offer additional products or services will be able to do so as long as it doesn’t impact the existing supply.
Similarly, if production is going to be increased there might be a need for added labor. As wage costs increase, pricing might need to adjust accordingly. In economics labor costs areusually the highest expenditure incurred by a business.
Once you have identified your market you must determine your pricing strategy. In microeconomics, the equilibrium price is where the quantity supplied meets the quantity demanded. This means that where you set the price will impact the amount of people willing to buy it. For instance, if you set a price above the equilibrium it doesn’t necessarily mean higher profits since you might be attracting a smaller and more selected market. The price you set needs to match the budget of your target market.
Consumer Buying Patterns
The way that consumers respond to prices set by businesses depends on the opportunity cost. When suddenly the price of milk rises and you have a tight budget perhaps you will now have to forego buying the cookies. If you only occasionally buy milk then perhaps you will choose not to buy the milk and buy something else instead. The variance in quantity demanded when prices fluctuate is referred to as elasticity. The higher the elasticity of the product you offer, the more important it is that you keep an eye on microeconomics to learn how it affects your business’ decisions.
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