CHARACTERISTICS

OF
MICROECONOMICS
GROUP 1
Characteristics of Microeconomics
1. Microeconomics focuses on the choices made by individual decision units such as households, producers, and
firms.
2. Microeconomics looks at how prices are determined. Microeconomics is often called “price theory”
1. Pure competition – a marketing situation in which there is a large number of sellers of a certain product which cannot be
differentiated, thus, no firm has can control its price.
2. Monopolistic competition – consumer substitute between the similar products. One product many brands.
3. Oligopoly – a competitive situation in which there are only few sellers of products that can be differentiated but not to any
great extent.
4. Monopoly – a single seller or producer that excludes competition from providing some products.
3. Microeconomics is concerned with social welfare.
4. Microeconomics has a limited focus.
5. Microeconomics develops skills. The study of microeconomics helps to develop a set of useful and marketable
skills.
Characteristics of Microeconomics
a) Microeconomics enhances your logical reasoning.
b) Microeconomics will help you develop skill in the construction and use of models.
c) [This is one of the major skills economists offer to the business community]
d) Microeconomics employs optimizing techniques that are useful for making decisions in a variety of situations.
e) The concepts studied in microeconomics are applicable to personal resource allocation decisions such as your
career choices or financial investments.

Economic model is a simplified description of reality, designed to yield hypotheses about economic behavior that can
be tested.
◦ The supply and demand could be expressed in three different forms:
1. Verbal or logical
2. Mathematical
3. Graphical
Law of Supply - states that the quantity of a good supplied (i.e., the amount owners or producers offer for sale) rises as
the market price rises, and falls as the price falls.
Supply – is a schedule of prices and quantities that a supplier or suppliers would be willing to offer for a sale at each
price per period of time.
Verbal: [As suppliers, they would be encouraged to sell more at higher prices and would sell less at lower prices. This
is because higher prices mean higher profits, and lower prices mean lower profits. Prices and quantity offered for sale
are directly related, the higher the price, the more supply; the lower price, the less supply.]
Mathematical: [The law of supply can be also expressed in mathematical notations. Mathematical notations are
shortcut representations of verbal explanation.]
Qs= 500P
The equation Qs=500P means that if the price is Php 1.00, the quantity supplied Qs would be P500 (500x1 = 500). If
the price is Php 3.00 quantity supplied would be Php 1,500 (Php500.00 x 3= Php 1,5000; and if the price is Php 6.00
quantity supplied would be Php 3,000 (Php 500 x 6= Php 3,000)
Graphical: [The law of supply can be also expressed graphically. If we compute the supply schedule as expressed in
the equation, Qs= 500P.
 Supply Schedule
Price Quantity Schedule

1 Php 500.00

2 1,000

3 1,500

4 2,000

5 2,500

6 3,000
 Supply Curve
Price
4.5

3.5

2.5

1.5

0.5

0
500 1,000 1,500 2,000 2, 500

Quantity Supplied
Models are abstractions
- Models focuses only on the essential elements of an object or process.
[We analyzed the behavior of supply only from the point of view varying prices. We mentioned that if prices are high,
quantity supplied would be also high.]

Microeconomics is concerned with three types of models:

◦ There are models to explain the resource allocation or “choice” decisions of individual household, producers, and
firms.
◦ There are models to explain how prices and quantities exchanged are determined in various types of market.
◦ There are models to examine the market economy as an interrelated system (general equilibrium model)
An example of a model
Intervention in the energy industry has been practiced by government in at least four forms:
Price – the amount of money that has to be paid to anyone a given product.
Tax administration – means that verification of tax return or claim for credit, rebate, or refund.
Licensing – the act of giving people of official permission to do, have, or sell something.
Rationing – is the controlled distribution of scarce resources, goods, services, or an artificial restriction of demand.
Assume a petroleum product demand function that can be expressed as:
Qt= a – bP
Where: Qt is the total industry sales
P represents the selling price of the private firms acting jointly
a and b are positive coefficients (demand and price, and consumer spending and GDP)
Start with the tree firms of equal sizes acting jointly as a joint monopoly with identical unit variable cost of K. Profit
will be maximized when:
P= a=bk/2
And the resultant sales would be:
Qt= a+bk/2

TWO SALES POLICY OPTION THAT GOVERNMENT CAN TAKE:

Sales-Neutral Strategy
- in the sense that regardless of the price it sets, it leaves the elasticity of demand facing the private firms the same as
before the entry of government.
Discriminating Sales Policy
- In the sense that it elects to sell the product to buyers prepared to pay higher prices for the commodity.
[This can only happen if it is the low price seller in the market and is so tolerated by the private firms.
Private firms can follow any of three price strategies, in reaction to the price set by the government firm;
Strategy A : Select a price level that will maximize joint monopoly profits after allowing the government to sell all it
can at the price that it selects. Private firms will end up pricing above the government’s price level.
Strategy B: Price the government firm’s price level and sell all that the market will clear up to the extent of (private)
capacity.
Strategy C: Match the government price in the cooperative fashion and share the market proportionately.
Comparative statics is dynamic analysis
Comparative statistics - focus the shift in equilibrium position (statistics) for an individual decision unit, a market, or
an economic system.
Microeconomics – uses comparative static analysis
Equilibrium - refers to a state in which there is a balance of internal forces and no tendency for the situation to
change unless outside forces intervene. A system in such and equilibrium may also be termed '' static ''
Dynamic analysis - focuses on the pattern and rate of change for some variable between points in time.
Partial vs. General equilibrium - partial equilibrium analysis compared equilibrium changes for one decision unit or
one market independent for related changes in the economic system.
- It assumes for the purpose of analysis that other factor will remain the same (i.e. '' ceteris paribus '' assumption).
General equilibrium analysis - recognizes the interdependence of all the decision units and all markets in the
economic system.
- It examines change within the context of the entire system. All variables are allowed to adjust in response to initial
change. The changes are then incorporated into the calculations.
For example, we know that the demand for a commodity depends on not only on its price (P), but also on income ( Y),
population (Po), price expectations (Pe), advertising and promotions (Ad) among other things. This attempt to
include all possible variables that would effect demand would fall under the general equilibrium analysis. A more
realistic demand equation can now be expressed as: Qd = f (P, Y, Po, Pe, Ad)