PRICINGHow microeconomics affect it.

Introduction Microeconomics is a field of economic study

that focuses on how an individual's behaviour and decisions affect the supply and demand for goods and services.

Price is derived by the interaction of supply and demand.

A demand curve gives the relationship between the quantity of a good that consumers are willing to buy and the price of the goods.

A supply curve gives the relationship between the quantity of a good that producers are willing to sell and the price of the good.

Equilibrium PricePrice is derived by the interaction of supply and demand. The resultant market price is dependent upon both of these fundamental components of a market. An exchange of goods or services will occur whenever buyers and sellers can agree on a price. When an exchange occurs, the agreed upon price is called the "equilibrium price", or a "market clearing price.

Now, we put the demand and supply curves together to understand the market mechanism.The two curves intersect at the equilibrium price and quantity where the quantity supplied is equal to the quantity demanded.

Effect of decrease in supplyWhen supply of the commodity falls in the market due to any particular reason, demand remaining constant, its price rises as the commodity would not be easily available in the market.

There is an inward shift in supply.

Suppose , the demand and supply of cadbury rasgolla is equal at the point where D1 and S1 meet, with quantity demanded of the sweet is on the x -axis and the price of the sweet on the y-axis. If the price of milk falls, milk being the main component of rasgolla, the sweet maker would increase the supply of the sweets. Hence, supply curve shifts to the right of S1 and equlibrium price falls from original price P1 to P3.

This is an outward shift in supply.

Effect of increasing demand Suppose there is an increase in income. This would lead to higher purchasing power for a consumers, demand for a commodity goes up, hence , demand curve shifts to the right ,keeping supply unchanged. The market price for that product goes up.Shifting of the demand curve depends upon a host of other factors.

Here, the demand curve shifts from D1 to D2 to the right which pushes up the price from P1 to P2 as the producer knows that consumers would buy his product anyway and hence, the output also increases from Q1 to Q2.

Instance of Increase in demandThis phenomenon can be explained with a real life scenario. Recently, our Human Resources minister has been talking about the dearth of employable graduates in India. The supply of good MBAs thus has been constantly low. IIM graduates are highly demanded in our country because they are thought to be as very effective and efficient managers. They are short of supply in our country as they prefer to work with foreign companies abroad. This inequality in demand and supply is actually the reason why they are paid very high salaries.

Shifts in both demand and supply curvesIn most markets, both the demand and supply curves shift from time to time. Consumers, disposable incomes change as the economy grows( or contracts, during economic recessions). The demands for some goods shift with the seasons( fuels, cotton wears, umbrellas), with changes in the prices of related goods or simply with changing tastes. Similarly, wage rates, capital costs, and the prices of raw materials also change from time to time, and these changes shift the supply curve.

Shifts to the right of both the demand and supply curves result in a slightly higher price and a much larger quantity. In general, price and quantity will change depending on how much the demand and supply curves shift and on the shapes of those curves.

Continued…In the initial stages of launching the Apple iPhone 4 in 2011, the supply was very limited. But demand from consumers using high-ended products was pretty high as compared to the supply. So even if the supply increased to meet the rising demand, it could not meet so this shifted the price upwards. This is one of the reasons why the gadget is very costly.

Effect of substitutes on pricingTwo goods are substitutes for which an increase in the price of one leads to an increase in the quantity demanded of the other.

When the goods are perfect substitutes like Nike and Reebok shoes, if the price of Nike shoes rise, then demand for Reebok shoes would rise. As both the brands are well-established in the market, consumers would not thinking twice before switching from Nike to Reebok because they know that Reebok would provide comfortable shoes as well.

Effect of complementary goods on pricingTwo goods are complements, for which an increase in the price of one leads to decrease in the quantity demanded of the other.

Suppose the price of paint increases, the demand for paint brushes would fall along with the demand for paint colours falling. Parents of young children might prefer to buy them pastel colours than paint colours.

Effect of competitionThe price that a firm sets is determined by the competitiveness of its industry, and the firm's profits are judged by how well it balances costs to revenues. The more competitive the industry, the less choice the individual firm has when it sets its price.

Perfect Competition - A large number of firms produce a good, and a large number of buyers are in the market. There is little room for differentiation between products, and individual firms cannot affect price . Market price is the price of the product.

Monopolistic Competition - A large number of firms produce a good, but the firms are able to differentiate their products. There are also few barriers to entry. Each firm has relative freedom to set its own price.

Oligopoly - A relatively small number of firms produce a good, and each firm is able to differentiate its product from its competitors. Barriers to entry are relatively high.

Monopoly - One firm controls the market. Because the firm controls the entire share of the market , it can charge any price.

CONCLUSIONWe can analyse the economy by examining how the decisions of individuals and firms alter the types of goods that are produced. Ultimately, it is the smallest segment of the market - the consumer - who determines the course of the economy by making choices that best fit the consumer's perception of cost and benefit.

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