Importance of Microeconomics

ECO 415 1) With examples, give 5 reasons why the study of microeconomics is important.

2) Define “ceteris paribus”. Explain why the device of ceteris paribus is so important in economics.

Prepared for: Prof. Madya Habibah Lehar
Prepared by: Nik Syahirah binti Nik Muhammad : 2012636032 : BA2F

1) The Importance to study Microeconomics.
Microeconomics as has been stated by those who have studied Latin know that the prefix “micro-“ means “small,” so it shouldn’t be surprising that microeconomics is the study of small economic units (Jody Beggs). As referred to the book on Understanding Economics Third Edition, microeconomics is a study in economic activities and decision-making of an individual like a seller, buyer, or consumer, firm or producer or a government unit or level. This study is concerned about the demand and supply of particular goods and services and resources such as cars, clothes and computers. At the same time, it can determine the aspects which influence individual economic choices and how the choices from various decision makers are organized by markets. To further the understanding of microeconomics, here are a few importance of microeconomics study.
First of all, it leads to get a better understanding the working of economy. This study totally gives bird’s eye view of the economic world as it gives understanding of economic works as a whole. This study covers each single aspect which is related to the economic issues. It helps in understanding how the macroeconomic variables behave in aggregate. For example, study of the national income, aggregate output, employment and national expenditure is very essential to understand the working of the economy.
Second, the microeconomics is totally important in consumer decision-making process. Business draws upon microeconomic data to make several of critical choices, any one of which could mean the success or failure of their business. It shows that the reliability and currency of the information a business uses, therefore, is of the utmost importance. In a logical aspect to make any decision of an economic business, microeconomic data may be reduced to mathematical constructs from which logical decisions may be made. Let 's say we have a theoretical company, Firm D, which manufactures and sells school bags. Microeconomic data from this imaginary company has shown that its customers have a preference for bags with roller at a certain price. The previous year the company sold 50,000 bags at RM40 each. For the sake of argument, let 's say that this year the economy has not changed. The gross national product (GNP), unemployment rates, interest rates and the stock and bond markets are all basically the same as the previous year. Logic would dictate that at least another 50,000 bags with roller be manufactured and offered for sale.

Besides that, microeconomics helps to understand the general unemployment. The use of microeconomics is helpful to solve the complex problems nowadays especially in general unemployment. This disaster occurs due to the deficiency of effective demand. The labor force only includes workers actively looking for jobs. People who are retired, pursuing education, or discouraged from seeking work by a lack of job prospects are excluded from the labor force. Economists divide unemployment into a number of different categories, since defining types of unemployment more precisely sheds some light on why unemployment occurs and what can be done about it. There are a few types of unemployment which are Frictional Unemployment, Cyclical Unemployment, and Structural Unemployment.
Next, microeconomics also works to control economic fluctuation. The fluctuations here are like trade cycle, inflation, deflation and so on which need to be handled properly in appropriate period of time to correct them. The reason behind such an economy is to make sure that everything needed is produced and that everyone 's needs are fulfilled. The main drawback of planned economies is that those who plan the economy must know exactly what should be produced and in what quantities; otherwise, people will not be able to buy as much as they need and shortages will occur. It may be chaotic at times, allow people to change along with the shifting market conditions to maximize their profits. For instance, in 2000 there was a shortage of tetanus vaccine in the United States; one of the two companies that had previously made it went bankrupt. Because it was expensive to make, other companies were unwilling to start production themselves, leaving only one firm struggling to keep up with demand. In a planned economy, this shortage would not happen because the government would boost production of the vaccine if it were needed.
Last but not least, microeconomics helps in knowing the conditions of efficiency. As stated by Kiran, microeconomics helps in explaining the conditions of efficiency in consumption, production and in distribution of the rewards. Here, it points out the factors in controlling the departure from achieving the optimum efficiency. It suggests policies also which help in promoting the economic efficiency of the society. For example, a small group of people who placed a high value on hawks bought a mountain in Pennsylvania. Today our laws protect hawks and other predators, but in the 1930s hawks were in danger of extinction because they were hunted as vermin that ate chickens. The association was able to save the hawks because its members demonstrated, through competing money bids, that a sanctuary was the most efficient.
In conclusion, the study of microeconomics reveals how both consumers and businesses make financial decisions. The great lesson of microeconomics is how individual decision making can be described in certain mathematical formulae, may be predicted with reasonable accuracy, and how each of these individual choices, both consumer and business, when multiplied many million-fold create the economic conditions in which we live.
References

Jamaliah Taib (2012), et.al. Understanding Economics Third Edition, Malaysia : McGraw-Hill (Malaysia) Sdn. Bhd.

Jody Beggs , About.com Guide.
Microeconomics 101 http://economics.about.com/od/economics-basics/u/Microeconomics-101.htm

Kiran, Importance of Microeconomics http://economicsexposed.com/importance-of-micro-economics/ 2) What is “ceteris paribus” and the importance in economic?

Ceteris Paribus basically means “all other things equal.” It is a Latin phrase used primarily to clarify a basic assumption. It’s very helpful because it can explain the difference between generalizations and laws of nature. Both generalizations and laws of nature happen most of the time, but not all the time. The difference is you can confidently state that laws of nature are still universally true, even though they don 't happen 100% of the time, as long as all other things are being held constant. Based on the Third Edition of Understanding Economics book, we can simply find the word of “ceteris paribus” when defining demand. Demand is the quantity of a good or service that buyers are willing and able to purchase at different prices in a certain period of time in a given market holding other factors constant or we called “ceteris paribus”.

The term of ceteris paribus is involved in the Law of Demand. It is an inverse relationship between the price of a good and the quantity buyers of willing to buy. An increase in interest rates will 'ceteris paribus ' cause demand for loans to fall. Higher interest rates increase the cost of borrowing so there will be less demand for loans. However, if confidence was high, people might still want to borrow more. Ceteris paribus assumes things like confidence remain the same. If the products’ price increases, ceteris paribus, the quantity demanded for the good will fall. For example, an economist might explain the law of demand by saying "If demand drops, then prices will fall to meet demand ceteris paribus. This lets you know that the only two variables that are being discussed are price and demand. If demand falls, and prices go up, then you know that all other things are not equal.

Furthermore, Ceteris paribus is possibly the most important single assumption to economists. It allows us to understand how changing only one factor in a complex world affects all other factors However, in its appeal, it has a major flaw. That flaw is also something economists know so well, endogeneity. In other words, everything in the world is connected and somehow affects everything else, therefore, ceteris paribus is not a realistic assumption.

Moreover, Ceteris Paribus is a concept that economists use to define cause-and-effect relationships that are isolated from external factors. So then, it is such a need to consider that financial decisions we make as consumers do not solely have one cause. Let say you want to open a 36-month CD and you shop for the best rate at area banks. The bank you choose may seem straightforward - but your answer may change based on changes in information. What if the Fed announces that it expects inflation to skyrocket at the end of the year - you may want a shorter-term CD because interest rates may have to rise to accommodate the higher inflation. In fact, it is difficult to predict the decisions of many consumers and producers when you change a wide swath of variables at once. So we change one at a time in order to examine its impact - all other things equal (ceteris paribus), boosting income causes consumers to save more, which means we expect to see more funds go into CDs. Ceteris Paribus, the more likely interest rates are to drop or stay the same, the longer term savers are likely to use for CDs.

Our way out of this unsatisfactory situation to reject the widespread notion that the achievements and the scientific status of the special sciences must be understood in terms of ceteris paribus laws. Based on the above explanations, I know that ceteris paribus is totally important in the economic world and very helpful in many particular situations.

References
Jamaliah Taib (2012), et.al. Understanding Economics Third Edition, Malaysia : McGraw-Hill (Malaysia) Sdn. Bhd.

William B.Elliot, Phd
What is the Ceteris Paribus? http://sunsetatsadies.com/ceterisparibus/index.php?option=com_content&task=view&id=6&Itemid=1 Marshall, Alfred (1824-1924) Principles of Economics http://www.econlib.org/library/Marshall/marP.html Wikipedia the Free Encyclopedia, Ceteris Paribus
http://en.wikipedia.org/wiki/Ceteris_paribus

References: Jamaliah Taib (2012), et.al. Understanding Economics Third Edition, Malaysia : McGraw-Hill (Malaysia) Sdn. Bhd. William B.Elliot, Phd What is the Ceteris Paribus? http://sunsetatsadies.com/ceterisparibus/index.php?option=com_content&task=view&id=6&Itemid=1 Marshall, Alfred (1824-1924) Principles of Economics http://www.econlib.org/library/Marshall/marP.html Wikipedia the Free Encyclopedia, Ceteris Paribus http://en.wikipedia.org/wiki/Ceteris_paribus