How does Microeconomics Affect Business
Microeconomics studies how the decisions and interactions of individuals and businesses affect the economy. When people place a demand on a product, businesses usually respond by adjusting supplyof a good or service. Given that resources are scarce, it is important to make use of microeconomics to make sound business decisions.
In order to help you, in this oneHOWTO article we'll go into detail and discuss how does microeconomics affect business.
Microeconomics and the law of supply and demand
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 and thus affect business.
When things remain the same, 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 success in business and to generate a profit.
Starting a business with microeconomics
When you are first starting a business, from a traditional family company to something modern like monetizing a podcast, it is fundamental to carry out extensive research into the industry of your interest, including aspects of microeconomic theory.
If you start a business, you will 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. This is a clear way to understand how does microeconomics affect business.
Microeconomics and the cost of goods and services
Whatever you produce, you'll want to do so in a way that minimizes costs and maximizes profits. In microeconomic theory, 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 microeconomics, labor costs are usually the highest expenditure incurred by a business.
How does microeconomics affect pricing decisions
Once you have identified your market and client target, 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 selective market. The price you set needs to match the budget of your target market.
Microeconomics and consumer buying patterns
The way that consumers respond to prices set by businesses depends on the opportunity cost. When the price of milk rises suddenly and you have a tight budget, perhaps you will 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 the subject to learn how microeconomics affects your business decisions.
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