Microeconomics theory and analysis is useful in understanding and predicting the behaviour of firms and industries. Discuss.

Essay by stevenboshUniversity, Ph.D.D+, January 2004

download word file, 10 pages 2.3 1 reviews

Downloaded 304 times

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...