Topics: Economics, Supply and demand, Macroeconomics Pages: 5 (1432 words) Published: April 23, 2013
Question 1) With examples give 5 reasons why the study of microeconomics is important.

Microeconomics is a field of economic study that focuses on how an individual's behaviour and decisions affect the supply and demand for goods and services. For the purpose of microeconomics, the actions of individuals, households and businesses are crucial, unlike the study of macroeconomics, which focuses on national and international economic trends. Despite the differences between the two fields, however, micro-level trends and the study of microeconomics are considered the basis of modern macroeconomics. Macroeconomics is concerned with the big picture, for example, the national economy and gross domestic product. By contrast, microeconomics is concerned with the small picture and focuses on theories of supply and demand. Firstly, microeconomics is very important in business, especially when it comes to a new business. Entrepreneurs create businesses by purchasing and utilizing factors of production. In order to estimate the potential return on investment (ROI) of those factors of production, entrepreneurs must have a basic knowledge of microeconomic concepts such as supply, demand, cost and profit. Without the basics of microeconomics, it is impossible to know how much a particular good can be sold for in a particular area. Furthermore, without microeconomic basics on costs and earnings, it is impossible to estimate ROI, thus will lead to poor financial investments. Microeconomics is very useful in business decision making. It helps business to achieve maximum production with the given amount of resources. Business firms can make decisions in demand analysis, cost analysis and methods of calculating prices.

Second, marketing people must have a basic understanding of microeconomics so that they can set prices for products and decide in which markets to sell those products. For example, with an understanding of microeconomics, a computer company marketing manager can advise the CEO to start allowing instalment payments in case of an economic downturn, thus recovering business from customers hit hard by the recession. A marketing manager without a sense of economics might not realize that such options are available.

Third, microeconomics is important when it comes to management. Managers must understand the concept of return on investment (ROI) when setting salaries for new hires, as employees are supposed to generate profits for the company. Managers must also have an understanding of microeconomics when making general budget decisions. A project shouldn't be given a budget that exceeds what the project is expected to produce in future earnings. These kinds of decisions are based on the microeconomic concepts of cost, revenue and profit.

Fourth, Finance and Accounting also requires the understandings of microeconomics. Finance people probably use microeconomics more than anyone else in business. Financial analysts use microeconomic and macroeconomic theories in order to forecast the future value of financial assets. For example, gold, stocks, bonds and other investments. A securities analyst might use microeconomic data to determine the change in income of people in a given country, then use the microeconomic concept of "price elasticity of demand" for the responsiveness of consumer demand to changes in consumer income and to determine whether the price of a given asset will rise or fall in that country. Accountants use financial ratios that are derived from microeconomics.

Lastly, the understanding of microeconomic is needed to provide tools for economic policies. Microeconomic helps to impose tax rates by analyzing the demand and supply factors. It also helps to determine the government policies on the resource allocation and pricing. Government also make policies to control the prices of goods by using the theory of price ceiling and price floor. By understanding microeconomics, we can examine the implications and...

References: Question 1 reference:
Importance of microeconomics, http://www.slideshare.net/tribhuwan64/presentation-on-importance-of-microeconomics
Importance of microeconomics, http://www.ehow.com/info_8301181_importance-microeconomics-business.html
Question 2 reference:
Microeconomics for Today, books.google.com.my/books?isbn=0538469447
Basic Tools in Economics, http://wikieducator.org/Basic_Tools_in_Economic_Analysis
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