Understanding Microeconomic Concepts: A Simple Guide

Introduction

If you’re studying in a Diploma in Business Management program at New Brunswick College of Business & Management then you have a lot of learning to do upon which you can build a solid foundation for your studies and future career. The fundamentals of microeconomics are what this blog consists of. We know that economic concepts can sometimes be a little daunting. However, you no need to worry: let's face it. What we intend to do is make things simple for you so that you're able to grasp theses basic concepts without getting lost in the details.

Do all of you know what microeconomics is? Microeconomics is the study of how individuals and organizations decide on resources, costs and goods. In this blog we will go deeply into key microeconomic ideas such as pricing strategies, supply and demand along with several market structures.

What is Microeconomics?

Microeconomics is the study of choices organizations and people make. Imagine walking into a store. Why did you select one product over another product? Why did the pricing of the product occur? All these relates microeconomic concepts. This is different from macroeconomics, which looks at the economy from a large scale, focusing on the complete economy, and concentrates instead on the little picture of the economy, on individual markets and decisions.

Let’s get down with some of the most crucial microeconomic concepts that you will need to know:

1. Supply and Demand known as "The Backbone of Microeconomics"

You’ve probably heard of the concept of supply and demand before, but what does it really mean?

• Supply refers to quantity of goods or service that is available currently.

For example, if there are tons of mobiles available, this implies that the supply is high.

• Demand refers to the requirement of a particular good or service by the people.

If quite a number of people out there want these mobiles, then that means the demand is high.

Furthermore, these two forces work together to determine the prices. If supply is low and demand is high (for example, a ‘cool’ mobile phone goes out of stock), the price spikes off the roof automatically. If the supply is high and demand is low (this last season’s fashion items, for instance) then prices tend to head inexorably downwards.

In general, the basis for supply and demand in the real-world businesses updates its prices accordingly. Everybody working in business management will know when to raise or lower prices which could make such a difference between profit and loss in organizations.

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2. How Prices are Set - Pricing Strategies:

Another of key microeconomic concepts is pricing strategy. Businesses set prices for various reasons, such as costs, competition and value they regard the product they are selling to have. Various pricing strategies that businesses will use, including:

• Cost-Plus Pricing: They use the calculation of how much it costs to make an item, add a markup. For example, a coffee shop buys coffee beans for $1 a bag, which they might sell a cup of coffee for $3 when you factor in the costs of labor and rent.

• Penetration Pricing: To get more customers, sometimes a company decides to enter the market with a low price. Once they get market share, prices will be increased over time.

• Premium Pricing: Sometimes companies do that with the products which price becomes higher than they actually are, to mirror that status. For example, a price tag is placed to the brand’s image, like in brands such as Apple or Gucci.

Learning these strategies will allow you to make knowledgeable decisions if you pursue management career in future, particularly with deciding the pricing of products or services competitively.

3. Elasticity: How Responsive Are Consumers?

Elasticity concept refers to how much variation of a product with respect to the variation of its price. There are two main types to consider:

• Price Elasticity of Demand: We call a product 'elastic' when a small change in price produces a large change in how much people want to buy. An elastic demand is one where, for example, when the prices of ticket for a movie theatre are raised, people tend to go less often.

• Inelastic Demand: If a product isn’t very sensitive to price changes —people don’t naturally change their desire to buy based on the price—then the product is considered “inelastic.” What about necessities like gas or medicine — whatever the prices, people will still need their products.

For business management, if your product or service ‘is elastic’ or ‘inelastic’ then it can help you make the smarter prices.

4. Market Structures: Who’s Competing?

Different market structures determine how businesses compete to provide the same or close to the same product. The four main types are:

• Perfect Competition: There are many small businesses selling the same products or similar products as in the agricultural market. Price is determined by no single business and there’s lots of competition.

• Monopolistic Competition: Similar, but not identical, products are sold by many businesses. Imagine fast food brands – they all sell burgers to differing degrees, companies distinguish themselves with advertising.

• Oligopoly: The market is controlled by a few large firms. The main point usually is that they have significant powers to control pricing and often influence one another’s decisions as well. Car manufacturers or airline companies can be used as examples.

• Monopoly: There’s only one company in the whole market. This occurs mainly when a business is the sole owner of resource or technology. The business can set higher prices because there’s no competition.

Perhaps the key to developing an effective business strategy is knowing your market structure. If you are in a monopolistic competition, then marketing and branding will be critical, but in an oligopoly, you would have to watch your competitors' moves closely.

5. Opportunity Cost: Weighing Your Options

As someone who’s been in business, and as someone who’s experienced business challenges that are as old as soil, it’s been clear that in life, and in business, every decision requires a trade-off. Opportunity cost is the idea so you can understand what is the cost when choosing something. For instance, if you do decide to spend money on a new advertising campaign, spending the money may have also been the opportunity cost of leaving those other things out, such as upgrading your equipment or hiring more staff.

Understanding the concept of opportunity cost tells businesses how to weigh the costs of choices they make, and to consider all possible outcomes when making a financial decision.

How These Concepts Relate to Business Management Students?

As a student of New Brunswick College of Business & Management, you already know that mastering these microeconomic concepts is what will provide you with the strong foundation of your Business Management Diploma. Supply and demand analysis, setting the price, and market competition knowledge require these ideas to be a foundation for any successful business strategy.

Also, these concepts aren’t just good for the classroom, they’re pretty darn practical in the real world of business. And no matter if you end up working in marketing or finance or, say, operations, microeconomics has skills like cost cutting that will help you make better decisions that hopefully help your business make more money, be more efficient and get a competitive edge.

Wrapping It Up

Microeconomic concepts such as supply and demand, pricing strategies, elasticity, market structures and opportunity cost will ensure you stand prepared for your Diploma in Business Management at New Brunswick College of Business & Management. These principles will give you skills which can be useful for your future career and also for your studies.

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