Microeconomic Theory

Microeconomic Theory
Name:
Institution affiliation:
Course:
Date of Submission
Microeconomic Theory
The most basic principles of economic transaction are examined by microeconomics through focusing behavior of individuals and businesses. The economic reality is acted upon by individuals’ assumptions, which surmise that decisions that are made by individuals or a company are aimed at maximizing profits. Individual entrepreneurs purchase produce from suppliers who have the best quality raw materials or resources and offering the lowest price possible. This decision enhances the operation of the business to become profitable since many consumers of the product are opting to purchase the product. An increase in rate of return results to entrepreneurs expanding their business to enhance growth and accommodate the ever increasing demand for the product. Using returns to purchase more goods and service is part of the economic model, as spending what is earned has a basic implying that the value of goods and services bought is more that the value of money earned. The decision of individuals forms the basis of microeconomic analysis because it creates the every day choice in business and government.
Oil in the US is considered to be price inelastic since consumers have to purchase the commodity at the same quantity regardless of the price. The microeconomic determines what price per gallon demand of oil that will have the effect of price decrease. Policies usually employ such study in formulating normative question on sustaining overall reduction in dependence of foreign oil. The surge in prices of gasoline in the US oil industry was as a result of increased demand and reduced supply of the commodity. The supply of oil was reduced because of the political instability of oil suppliers which saw a reduced supply of oil in the international market. This saw a reduced supply of the product by national oil venders while the demand oil the product was high there by setting high prices for the commodity. The US depend heavily on foreign oil for its industrial operations and the reduced supply of the commodity in the international market resulted in a reduced supply of oil domestically, and this pushed the prices of the commodity upwards since many consumers of the product were willing to purchase it. With respect to microeconomic theory, the price of a product in the market is set by the quantity supplied and the quantity demanded at a particular time. The most import ant concepts in microeconomic theory is the law of supply and demand the structure of the industry and consumer behavior. It is thus, obvious that the generation of revenue depends on the aspects of demand and supply of a product at a particular time.
Supply and demand are the most fundamental principles of microeconomics as it makes the backbone of the economy. Supply is the quantity of the product that a competitive market has to offer to buyers at a certain price the relationship that exist between the quantity of supply and the price is referred to supply relationship where price is a reflection of supply and demands of a particular product. Demand on the other hand is the quantity of product in which buyers are willing and bale to buy at a particular time given a certain price in the market. Therefore the relationship between supply and demand underlies the forces that enhance in allocation of resources. Resources are well allocated through the use of market economy theories of demand and supply.
The law of demand states that in a closed economy and other factors remaining constant, high price of a particular commodity leads to less buyers demanding this particular product. T6he quantity of product demanded is thus inversely proportion to its price since high prices results to increased demand and consequently high prices of a commodity results to the quantity demanded reducing. In most cases the behavior of consumers with respect to high priced is less purchases because the opportunity cost of buying the product goes up.
Naturally consumers will have to avoid consumption of that product which could force them to forgo the consumption of another product that consumers value more.
The case of US oil price surge provides the basic principle of microeconomic theory where the factors of supply and demand for oil were in force. The supply of oil in the US was adversely affected and the outcome was reduced supply. This prompted an increase in the price of the commodity as consumers were willing to pay the price. Because the market experience shortage of oil the demand for the product increased surpassing the quantity of oil supplied in the market. This led to prices of the commodity to edge higher as the high demand called for an increase in supply to set the price of oil at equilibrium. The increased demand for oil resulted to increase in its price as consumers were willing to purchase at that given time. In order for the price to be set at equilibrium the supply of oil increased thereby stabilizing the surging price.
The law of supply demonstrates the quantity of a product to available in the market for sale at a given price in a particular time. The supply of a commodity in the market and the price offered of that particular product are directly proportional. This is because suppliers are willing to supply more w hen the prices ...