MSc Management Data Analytics
MSc Management Data Analytics
a. Introduction:
The report includes a discussion on 3 microeconomic theories, such as “supply & demand, elasticity, as well as market structures”. In addition, concepts like “utility, marginal analysis, as well as consumer choice theory in microeconomics” have been discussed. Also, evaluation of different market structures is included such as “perfect competition, monopolistic competition, oligopoly, and monopoly”. Proper examples have been given in order to explain the concepts in a better way from the real world.
b. Main Body:
1. 3 microeconomic theories, such as supply & demand, elasticity, and market structures (LO1):
Supply & demand:
“Law of supply & demand” is created on the basis of 2 economic laws such as “law of supply & law of demand”. Both of them must be understood separately. As per the views of Petrova et al. (2019), “Law of supply” states that with the increase in price, firms perceive more profit opportunities & increase supply of goods. On the other hand, “law of demand” indicates that with prices rising, buyers purchase less. The point where demand curve and supply curve intersect is known as market equilibrium. For instance, if any influencer or celebrity posts a good or positive review regarding a product on social media then this would increase demand for the same along with followers. This will lead to a rise in price of product. With the rising demand existing products are becoming scarce (Turvey, 2022). In addition, price is moving in the same direction just like product’s demand. However, there is an exception of this theory which involves items of necessity such as medicine whose demand would not decrease even if price increases.
Elasticity:
Demand Elasticity represents change in demand for any product with a change in any one variable which consumer consider an important part of purchase decisions. Not only this, it shows a relationship between other variable like price, substitute availability, advertising pressure & customer income and demand. Inspired by the views of Davies (2019), demand becomes elastic with a relatively small shift in price accompanied by any disproportionately bigger shift in quantity. For instance, airline sector is elastic as it is a very competitive sector. Therefore, if one airline company decides to induce price of fares, passengers can use opt for another airline company. In addition, the airline company that increased fares would see a significant decrease in its services’ demand. Based on this, important decisions can be taken by companies regarding their production process and buyers can also determine they are Purchase Decisions (Frank et al. 2021). For instance, if customer income increases then demand for luxury items will also increase which would help companies in taking initiative to increase supply. Similarly, consumers can purchase luxury items more often representing an increase in demand.
Market structures:
In macroeconomics, market structure represents the way different sectors are classified & differentiated on the basis of their degree & competition nature for products & services. This theory has been created on certain characteristics influencing behaviour & outcomes of firms operating within a particular market. Moreover, economic market structures are classified into 4 categories such as “perfect competition, monopolistic competition, oligopoly, and monopoly”. Influenced by the views of Mankiw and Taylor (2020), market structures help in determining the types of prices that companies set for the products that they are selling to the customers. While “perfect competition market structure” is not realistic because of unreal assumption made at the time of classification. In addition, Monopoly is a market structure which is not desirable because of complete control of the sellers.
2. Utility, marginal analysis, & consumer choice theory in microeconomics (LO2):
Utility:
In microeconomics, the term utility is used in determining the value or worth of a product or service. In other words, utility represents total benefit or satisfaction generated from consuming any service or product. It has been seen that economic theories on the basis of rational choice assume that buyers strive to maximise their utility (Akram et al. 2020). For instance, while shopping when buyers are hungry, they might make “optimized utility decisions” for themselves at that time, because they will prefer eating food that they are buying. Another instance can be a buyer buying a hamburger for alleviating hunger pangs as well as enjoying a tasty meal, that can provide him with some utility. In other words, consumers decide to purchase products based on the utility that they think they would derive from the consumption of the same.
Marginal analysis:
Marginal analysis in microeconomics is the examination of extra benefits derived from an activity compared to extra expenses of that activity. This concept can be used by both organisations and individuals in the process of decision making on a regular basis (Navin and Sinha, 2019). For instance, if a hotel possesses rooms in budget for other employees but wants to hire another staff who would operate in a warehouse, marginal analysis shows that recruiting this person provided it with a “net marginal benefit”. This shows ability of producing more outputs outweighs rise in labour expenses. It is a very important concept that can be used in the process of decision making by both individuals and organisations. It is also beneficial for taking decision at the time of purchasing additional outputs of product by both individuals and Organisations so that better outcomes can be achieved.
Consumer choice theory:
Inspired by the views of Dzhabarova et al. (2020), consumer theory in microeconomics involves a study of the process in which people make decisions of spending their money on the basis of individual preferences & budget constraints. In addition, it is a branch of microeconomics, showing how individuals are making choices that are subject to income available to spend & prices of products & services. For instance, when a customer decides to keep ice cream & return cookies, they apply “marginal decision rule” to the issue of increasing utility. In other words, the customer purchased ice cream as they expected that consuming the same will provide him greater satisfaction compared to eating box of cookies.
3. Perfect competition, monopolistic competition, oligopoly, and monopoly (LO3):
Perfect competition:
As commented by Valaskova et al. (2019), perfect competition is a market structure where a huge number of sellers & buyers are there. In addition, all the sellers in this type of market structure are small and remain in competition with one another. No 1 big seller is there with any important impact on the market due to which all the companies are price takers. The market operates on the basis of certain assumptions that have to be highlighted. Products are homogeneous or completely identical. Also, all companies only possess the aim of profit maximization. Free entry & exit can be seen from the market as there lies no barriers (Azar and Vives, 2021). Lastly, context of consumer preference is not there. This kind of a market is very difficult to find because of the unrealistic assumptions it has.
Monopolistic competition:
Monopolistic competition is a market structure where a huge number of sellers & buyers lie. However, they do not trade homogeneous products. In other words, products can be similar but sellers sell differentiated products. This means consumers get preference to choose one over the other. Also, sellers can charge higher prices marginally as they may get some power over the market. Eventually, sellers become price setters to some extent. For instance, cereals & toothpaste market represents a monopolistic competition as products are similar but differentiated slightly based on taste & flavours.
Oligopoly:
In the views of Mankiw and Taylor (2020), oligopoly is a market structure where only a few companies are there in the market. Clarity regarding number of companies is not there but, 3 to 5 dominant ones are considered normal. As a result, buyers are greater than sellers. It has been seen that companies either compete with one another or collaborate together. In addition, this kind of market structure uses their influence at the time of setting the prices as well as maximises profits. This makes consumers become price takers. Barriers to entry are high in this market because of which new companies find it hard to set themselves (). The most common examples are airlines, steel producers, automobile manufacturers, petrochemical as well as pharmaceutical companies.
Monopoly:
Monopoly is a market structure, where only 1 seller is there which means a single company would control the whole market. Monopoly market allows companies to set any price aa it possesses all the power within the market. Consumers do not have any alternative and must pay the price set by the seller. These kinds of markets are undesirable because consumers lose their power & market forces are not irrelevant. But, a pure monopoly market in reality is very rare.
c. Conclusion:
All the concepts and theories discussed in this study are very important for the process of decision making by both individuals and organisations across the globe. The theory of demand and supply helps in identifying how prices are determined. In addition, there are four types of market structures out of which perfect competition does not seem real because of unrealistic assumptions. When it comes to decision making, marginal analysis, utility and consumer preference theory play an important role.
d. List of References:
Akram, M., Dudek, W.A., Habib, A. and Al-Kenani, A.N., (2020). Imperfect competition models in economic market structure with q-rung picture fuzzy information. Journal of Intelligent & Fuzzy Systems, 38(4), pp.5107-5126.
Azar, J. and Vives, X., (2021). General equilibrium oligopoly and ownership structure. Econometrica, 89(3), pp.999-1048.
Davies, R.E., (2019). Laws of Demand and Supply.
Dzhabarova, Y., Kabaivanov, S., Ruseva, M. and Zlatanov, B., (2020). Existence, uniqueness and stability of market equilibrium in oligopoly markets. Administrative Sciences, 10(3), p.70.
Frank, R.G., McGuire, T.G. and Nason, I., (2021). The evolution of supply and demand in markets for generic drugs. The Milbank Quarterly, 99(3), pp.828-852.
Mankiw, N.G. and Taylor, M.P., (2020). Economics. Cengage Learning EMEA.
Navin, N. and Sinha, P., (2019). Market structure and competition in the Indian microfinance sector. Vikalpa, 44(4), pp.167-181.
Petrova, G., Posadneva, E. and Morozova, T., (2019). Leading the Labour Market by the Laws of Supply and Demand. In Sustainable Leadership for Entrepreneurs and Academics: 2018 Prague Institute for Qualification Enhancement (PRIZK) International Conference “Entrepreneurial and Sustainable Academic Leadership”(ESAL2018) (pp. 263-271). Springer International Publishing.
Turvey, R., (2022). Demand and supply. Routledge.
Valaskova, K., Durica, M., Kovacova, M., Gregova, E. and Lazaroiu, G., (2019). Oligopolistic competition among providers in the telecommunication industry: the case of Slovakia. Administrative Sciences, 9(3), p.49.
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