Notes

Question 1

Describe the microeconomics vs the macroeconomics.
Elaborate the factors that drive supply and demand.
Explain the four types of market structures in a private enterprise system and its effects to competition.

Answer:
Microeconomics and macroeconomics are the two branches of economics that cover economics on different scale. Macro economics covers the whole economy esp. in the scale of nations and multiple different market segments while micro economics covers individual consumer and individual market or economic units. This difference between these field emerged during the great depression when micro economics couldn’t explain why the economy was not recovering to reach equilibrium based on supply and demand. This is where macroeconomics entered where it tried to explain the reason by trying to identify certain factors as the cause of stagnation of the economy. Microeconomics helps us determine price of product while macroeconomics helps us maintain stability in general price level. Macroeconomies is used to analyze problems such as inflation, deflation, unemployment and solutions are developed while on microeconomics, competition, factors of production, pricing etc. An analogy of the difference between macro and microeconomics in economics would be the difference between study of atoms and astronomy in physics.
The factors that drive demand are taste and preferences, income of consumers, price of good, reach of advertisement, expectations regarding to future prices and demographics. These 6 factors influence the demand. Taste and preference determines which goods will have demand, for example, in some societies there might be high demand for non-lethal mouse trap while some places might want legal mouse trap. Income of consumers is drives demand because spending increases when taxes are cut as there is more income available while spending decreases when there is increase in taxes as there is less income due to taxes. Price of goods is one of the most important factor that drives demand as equilibrium price is always reached. When goods are sold too expensive, demand decreases while if they are sold for low prices, demand increases. Reach of advertisement also impacts the demand as companies increase their advertisement expenses to increase sales. With more advertisement, more people become aware of the product and the demand increases. Number of consumers or demographics directly impacts demand. Countries with low population will have lower demand than countries with higher population. And expectations of consumers regarding to future prices also impacts demand, this is clearly seen during black Friday when consumers hold on waiting for black Friday deals. All these factors drive demand.
Factor that drive supply are price, factors of production, cost of production, expectations, number of suppliers and technology. Factor of production directly impact the supply as they are the 4 major inputs needed to produce good which are natural resources (land), Labor, Capital and enterprise. Cost of production directly impact the supply as increase cost of production will decrease the supply. Expectations of business will impact supply as business increase productions based on their expectations to gain maximum profits. Movies business usually hold releasing movies for certain dates to increase profit. Changes if Number of Suppliers directly changes the supply in the market. Last of all technology impacts supply. In the past, the output of industry is considerably lower than that of today due to technology. Due to increase in output, prices also drop. All these factors drive supply.
Four types of market structure in private enterprise system are perfect competition, monopolistic competition, oligopoly and monopoly. In perfect competition, the price is directly influenced by supply and demand. No single firm have significant market power as all are small firm and compete on identical goods. Monopolistic competition is very similar to perfect competition however firms in monopolistic competition sell differentiated goods which allows them to sell goods at different prices. Oligopoly competition is when the market is controlled by a small number of firm. They can use their collective market power to impact price, set entry barriers. Monopoly competition is when the market is controlled by a single firm. This single firm can set prices and set high entry barrier.
In perfect competition, all competition is directly impacted by supply and demand as there is no differentiation of goods. There is no entry barrier for any competition to enter as no one owns significant market share. In monopolistic competition, all competition produces goods with differentiation, so they can set different prices. Competition can enter easily as no one owns significant share of the market. Competitions can easily exist and compete in this structure. An example would be in cereal industry where there are different companies charge different prices for their cereals and no cereal company owns significant share of industry. In oligopoly competition, few firm own major market share and hence can fully control the price. They also set entry barrier to competitors by affecting prices. Competitors can exist in this structure if the major firms don’t cooperate to push competitors out. An example of this would be in video game console industry where Sony, Nintendo, Microsoft control the market. In monopoly competition, all competition faces high entry barrier set by the single company that owns the market. Competitors cannot compete in this structure and will need help from government.
When establishing an international business venture, both microeconomics and macroeconomics should be considered. Macroeconomics gives the whole view of the market, stability, workforce etc while microeconomics gives us important detail which will help us set competitive prices, differentiate and compete internationally. An example of this would-be Amazon expansion into India. In Macroeconomic perspective, India’s average growth in GDP of 7%, its high market size and government policies made it reasonable venture compared to China where government policies put it in a disadvantage when competing against Alibaba. In Microeconomic perspective, Amazon has set different pricing to remain competitive in India. This is why factors that drive supply and demand are important when establishing an international business venture as demand must be there before going international and supply must be maintained to satisfy the demand Amazon plans to satisfy the growing demand of India’s growing middle class, as the growing middle class in India have increased income, taste and preferences, and a high consumer growth rate. In the supply aspect, Amazon plans to use the large available work force available in india for lower price compared to developed nations, use of india access to the ocean to increase supply and is cooperating with many local suppliers in India to increase supply of goods available. Last of all the market structure is important because monopoly competition must be avoided when establishing an international business venture. Ideal markets structure is monopolistic competition where new competitions don’t fact high entry barriers. One of the reason why Amazon chose India instead of China is because the market in China is controlled by Alibaba under a monopoly.
Amazon expansion Into India: https://www.forbes.com/sites/greatspeculations/2016/06/09/why-amazon-is-betting-big-on-india/#295bb9864555