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Microeconomics Theory And Analysis Is Useful In Understanding And Predicting The Behaviour Of Firms And Industries. Discuss.

2496 words - 10 pages

Microeconomics theories explain the way in which firms and industries operate and survive under conditions where resources are scarce. Therefore simply because of this we could say that microeconomic theories and analysis is useful in understanding the behaviour of firms and industries. Hence it could be said that the firms' behaviour will depend on the scarcity of these resources, as a lot of rational choices have to be made in the everyday running of the business, as the business cannot have everything that it desires. However, we must always take into consideration the fact that there is a significant difference in the theory behind business and in the way in which they operate in practise.The demand curve 'represents the amounts of a good or service that all consumers are willing and able to buy at a given price, at a given moment in time with all other prices and incomes fixed'. The relationship between price and demand is fairly obvious, that if a price of a good rises, the quantity will fall, and vice versa. However, it is not this simple as we do not know by how much the quantity demanded will change as a result of a change in price - price elasticity of demand. Hence the 'responsiveness of quantity demanded of a commodity to changes in price' will depend on the type of product simply because of the number of determinants that it has. For example, the higher the proportion of our income that is spent on a good, the more we will be forced to cut consumption when its price rises. Thus, an increase of 5% in prices of holidays will have a different impact on demand than in the price of butter was to increase by this much.However when price changes, demand is not the only thing that will be affected, but as a result of a change in demand supply will also change. Therefore a supply curve is used to show the relationship between the quantity of the good supplied over a given period of time and the price of the good. The relationship in this case is also simple as supply will increase with demand, though how large the increase is going to be in relation to demand depends on the type of product. This is because it depends by how much the costs rise as output rises, and the time period during which there is going to be an increase in demand. This knowledge of a particular product will be useful for any firm as it is useful to know how price changes will affect their revenue. Hence how the firm will react to an increase in demand will depend on this, as if the increase is not expected to last very long it is going to be pointless to invest in heavy machinery, therefore firms might simply decide to increase capital utilisation and produce more increasing inputs, such as raw materials.Therefore it is expected that firms will behave in different ways to achieve their aim (i.e. level of output) on the basis of this relationship. Hence the ideal situation is when the firm sells its product at the equilibrium price, where the quantity demanded equals the...

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