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Microeconomics

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Microeconomics

Comparative Advantage

Opportunity cost is the cost or benefit of a foregone alternative that could have been

derived for an option where a choice has been made. This concept is essential in the daily

decision-making in a given business or organization. The simulations demonstrate how

businesses and individuals carry out an evaluation of opportunity costs to make informed

decisions. Business entities understand the potentially missed opportunities in the process of

making a decision on which investment options to take. A critical evaluation of opportunity costs

in terms of both cost and benefits of each individual option at hand ensures proper decision-

making. Importantly, opportunity costs act as guidance in making profit-oriented decisions.

The production possibility frontier describes the production capacity of a given business

entity. The PPF depicts the different quantities of two goods that can be produced at limited

resources on which both of the two goods depend. This concept is used as a tool for decision-

making in ensuring optimum production. A company can decide to increase the production of

good A and reduce good B and vice versa while still maintaining the PPF curve.

Similarly, a firm’s decision-making process is influenced by comparative advantage. A

firm may make a decision to produce those goods, which will cost it less as compared to its

trading partners. For example, a company may use different cheaper raw materials to produce

goods similar to its competitors. This gives the farm a comparative advantage which in turn

yields high sales margins. The business decision to trade can cause a change in the PPF since any

combination of goods produced outside the PPF cannot be attained without trade.

Competitive Markets and Externalities

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Externalities can have a positive or negative impact on business activities. Negative

externalities can often result in market failure; hence the government makes use of policy

interventions. The policies used are; regulation to reduce the effects arising from externalities,

imposing taxes such as Pigovian taxes, and issuance of tradable pollution permits. Consequently,

these policy interventions impact the demand and supply equilibrium of particular products.

Imposing taxes increases the price of a given product, affecting demand and supply, hence

altering the equilibrium of that product. Regulation, on the other hand, will affect the quantity of

goods produced. This affects the supply of that commodity into the market hence impacting the

market equilibrium of demand and supply of that product.

The determinants of price elasticity of demand are factors whose alter in price influences

the quantity demanded. It basically measures how an economic variable responds to a change in

another variable. Examples of such determinants are income levels of potential buyers or

consumers, availability of substitutes, and type of category of the good, either a necessity or a

luxury. A pricing elasticity can influence the pricing decision such that a change in price affects

the quantity demanded, thus influencing firm revenue. A firm can set a price that yields higher

demand resulting in higher revenue (Zame & Noguchi,2006).). Lastly, policy markets

interventions such as regulation change consumer and producer surplus. This is due to the fact

that the quantity produced is very limited to prevent negative externalities, thus impacts

consumer and producer surplus.

Production, Entry and Exit

The decision-making process of the owner of a particular business of entering or exiting a

given market is influenced by a number of factors. The determining factors are; availability of

profitable business opportunities, level of competition in that market, government interventions

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in the market, and levels of infrastructural development and technological advancement. A

business owner uses the concept of marginal cost to determine production. This is achieved by

looking at which point the firm can achieve economies of scale, which implies optimal

production in its operations. For example, it determines the number of hours to drive depending

on the cost of gas and distance to be covered.

Fixed cost can impact production decisions in both the short run and long run, such that

an increase in fixed cost results in higher total costs incurred in production, which in turn

decreases profits. Therefore, fixed costs can impact the production levels of a firm (Canoy et

al.,2006). In scenarios where the average total cost falls as the output quantity increases,

economies of scale, in the long run, are yielded. Importantly, the concepts of marginal costs and

average total cost determine the productions of a business entity in any particular market.

Market Structures

Market Numbe Type of Price Price Freedo Short- Long- Industry

Structure r of Product Sold Taker Formula m of run run Examples
Firms ? Entry Profit Profit?
?
Perfect Infinite Identical Yes P=MC Yes Yes No
Corn and
Competition wheat
producers
Monopolistic Many Differentiate No P>MC Yes Yes No Clothes
Competition d retailers.
Monopolies One Unique No P>MC No No Yes Producers
of utilities
such as
LPG
Oligopolies Few Differentiate No P=MC No Yes Yes The
d automotive
and phone
industry
Both monopolies and monopolistic competition derive market inefficiency. Monopolistic

competition derives deadweight loss, which results from its monopolistic power. The price of the
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products is usually higher as compared to the marginal cost. Similarly, the excess capacity is

derived such that the quantity at equilibrium is lower in comparisons with the cost quantity at a

to the given lowest point. Monopolies, however, derive is that consumers lack socially efficient

products. For example, monopolies being price marker this creates disbalance between both

supply and demand.

Pricing of products in oligopoly is achieved by setting their desired prices rather than

taking market prices. They can be under a cartel or under a particular leadership. They make use

of a kinked demand model to determine prices. An example is the illustration of the prisoner’s

dilemma (Mankiw, 2021).

Profitability among the competing market structures is dependent on the number of firms

in the market, government intervention, product differentiation, and freedom of entry and exit.

For example, oligopolies seem to make profits when there is government intervention, while

monopolies prefer minimal government intervention.

Conclusions

In conclusion, as observed above, business decisions are influenced by a number of

factors such as comparative advantage, opportunity cost, type of market structure, market

competition, and externalities. Therefore, an upcoming entrepreneur must put these factors into

consideration to ensure informed and profitable decision-making in a business venture.

References
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Canoy, M., Van Ours, J. C., & Van Der Ploeg, F. (2006). The economics of books. Handbook of

the Economics of Art and Culture, 1, 721-761.

Mankiw, N. G. (2021). Principles of economics. Cengage Learning.

Zame, W. R., & Noguchi, M. (2006). Competitive markets with externalities. Theoretical

Economics, 1(2), 143-166.