Economics is the study and analysis of scarcity and how resources are used. Economics is broadly divided into Macroeconomics and microeconomics. Microeconomics is a branch of economics that deals with decisions made at an individual level. The individual ca be a person, firm or organization. Since the demand is higher than the available resource(s), Individuals or businesses must do an evaluation before making a decision. As an aspiring economist, the understanding of principles of microeconomics is very vital as they form the basis of the study. The knowledge of the nature of the market is very critical as the discipline focuses majorly on how the forces of demand and supply affect the market equilibrium. The basic concepts in microeconomics include the elasticity of application, diminishing return, elastic supply, market structure and role of prices and profits in influencing resource allocation
I will use Uber as a case study in analyzing the concepts. I will also discuss one of the ideas I found challenging and the weakness of using microeconomic approach. Finally, the paper also cover how the course has shaped my economic thinking.
Uber Technologies Inc. has caused disruptions in the logistic market since the introduction of its services. The tech company uses the android based application to provide her services. The firm started with a taxi but has expanded to the delivery of groceries, food, and packages. It also has UberEat that solely focus on the provision of lunch and dinner to clients. In this section, I will compare and analyze the microeconomic concept between UberEat and Uber delivery.
There has been an increase in demand for courier services in the USA and other countries across the global. This is due to grow some people adopting e-commerce. The increasing number of the middle class has also led to rising in demand for home or office delivery services. However, the need for the transportation services, both goods, and food, is very elastic. Just a slight dissatisfaction can lead to significant fall in demand for the services of the given company. Timely delivery is very essential. Similarly, the two cases do not obey the law of marginal utility and demand. It operates on the exact opposite of the same. The request for services increases with increase in the number of supplies (deliveries) as customers develops trust with the service provider. Increase penetration of Uber services literary means that more customers are getting interested in their service.
The success of the two products by Uber can be attributed its prices. The company rates are low compared to others. In the market of delivery, customers are very responsive to prices. A slight fall in price results in reasonably higher demand. This partly explains why the demand for UberEat and Uber delivery has gone up. The two products operate in similar market structure. The market is perfect competition. It is open for all companies, and it is not monopolized. Some of the businesses that operate in the same markets include; Deliy Inc., Instacart Inc., FedEx Corp. among others. Survival depends on the company’s ability to cut a niche as the market is highly competitive. Perhaps the most important concept is the role of prices and profits in influencing their operation. Uber has had to exit some cities as the market is not sustainable.
Most of the concepts of Microeconomics are not complex hence quite easy to comprehend. However, the understanding market structure was a challenge to me. In economics, the market structure can be perfect competition, monopoly, oligopoly, monopolistic competition or contestable market. The market structure is determined by the number of players. For instance, in a trust, the market is controlled by one player, and there are barriers to any entry by a competitor.
In microeconomics, market structure is taken to be perfect competition. This a market with several firms that sell similar products have no powers to control prices and make reasonable profits. The market also enjoys freedom as any business can enter or exit the market. However, the challenge was to identify the market structure.
To understand the market, I had to evaluate by making comparison among the five structures. I was using elimination method. The first to be eliminated was one with one or feature in a given market. For example, if a market had more than one player monopoly was automatically disqualified. The process continued till the only one that its remain in the list.
Even though it is important, microeconomic analysis has some shortcomings. Some of the limitations are;
Unrealistic assumptions- The most unreasonable assumption is that there is full employment which is impossible.
Inadequate data- Getting exact and accurate information from individuals is very hectic, and most people are not ready to divulge the required information.
Ceteris Paribus- Assumption that everything gives same satisfaction.
Out of the three and others, inadequate can be considered to be the greatest shortcoming of this approach. Microeconomics is used by the government in resource allocation, in developing economic policy, in fixing foreign trade and developing tax policy. Companies also use the same data to analyze individual behaviors. Inaccurate data leads to the wrong impression that has an enormous impact on the policies. For example, when people gives the impression that they have higher incomes the government can lower the allocation to that area. This will have a negative impact on people’s lives as they might not be able to access some services. Likewise, if the data show that people have low incomes yet their wages are high, the government might allocate to them resources thus denying more deserving areas. Inaccurate data can also give the wrong impression to companies that are willing to sell their products in a particular region. The impression could be of people with the ability to afford their products while in real case they are not. The opposite can also occur where the company misses on the market it would have exploited. The two scenarios will lead to a situation where the companies do not use their potential fully hence stifling growth. Since government depends on the analysis to develop her economic policy, corrupt data has an enormous impact on its plans. This will definitely to underfinancing or over financing some sectors. The government could locate more resources in building infrastructure yet the people could be in more need of services like quality healthcare and basic sanitation services. This gives the wrong impression of government like it has misplaced priorities.
The study of microeconomics has shaped and sharpened my thinking and understanding of the market. Initially, I did not understand how prices are determined. But the course has opened up my mind, and now I understand it is as result of the natural force of the demand and supply. The two curves meet at equilibrium. The point of balance is the market price of given product at given time. The equilibrium price is not fixed and can change depending on the demand or supply of the product. Increased demand with corresponding fall in supply leads to higher price while a decrease of the request and with increase in supply sets the market price at a lower point (equilibrium point).
The course has also enabled to understand why the slight increase in the price of some goods leads to unreasonably fall in their demand. These are products with very high demand elasticity. In such cases, people tend to purchase them more with fall in price. However, there are some that are not affected by the price fall. The decrease in price does not lead to a rise in demand. Their consumption is not affected by reduction prices. For example, even if the price of one Kilogram of salt goes down it does not lead to increase in its consumption. Such products have inelastic demand curve.
The theory of production has given me economic understanding on factors that influenced the final pricing of a commodity. The theory shaped my mind in the industrial process in manufacturing, processing, packaging, storing and shipping. All these processes add value to the raw material. The end product is more valuable than the raw material. The pricing must also include the total cost of production. The cost of production includes labor, capital, land, and other fixed assets. Even though the factors of production determine the end price, consumer demand theory also plays a part in influencing the market. It does not make economic sense to produce products that no one can afford to purchase. The company will be running at losing.
The understanding of the market structure has also helped in comprehending why some goods tend to have their prices fixed for a long time. In monopoly market structure, the manufacture is always at liberty to set her price. This is not the case with perfect competition market where companies sometimes resort to price cutting to break through or remain afloat. The type of market also influences the products available. In Perfect competition market structure, the consumer has several options to choose from. This is unlike monopoly market where the choice is limited to only one product. The user or customer has little or no choice. There is no opportunity cost for the product as it has no alternative. The exit and entry of new firms in perfect competition market also explain why some markets have new products being introduced every time.
The course has elaborately described the factors involved in understanding economics as a discipline. Macroeconomics has laid the foundation for the future study of another branch of economics, macroeconomics. Most importantly, the course has enabled to understand how markets operate. From production, manufacturing, and retail. These are the channels passed by most products. The knowledge acquired can also be used to determine the trend followed by given products hence preparation in advance. For none perishable goods I can make a purchase in bulk when there is sufficient supply and store for use when supply diminishes. The diminishing supply will result in high prices.