The difference between microeconomics and macroeconomics and the relevance of each of these to your business
The definition of the two disciplines provides the first evidence that exists between microeconomics and macroeconomics. By definition, microeconomics is the study of individual consumers and the business decisions made by the individual firms with respect to the relationship existing between and among them. On the other hand, macroeconomics is basically the study of the way the economy as a whole behaves on the basis of industry-wide approach with respect to economy-wide phenomena such as unemployment, government taxation, GDP price levels, national income and rate of growth. Thus while microeconomics looks at a single firm and how it makes decisions in the midst of competition for resources, macroeconomics takes an industry-wide approach by incorporating aspects that touch on the entire economy such as interest rates, rates of taxation and government legislation on imports and exports and mass unemployment.
The decisions made at the microeconomic level basically regard to how, where and when or to whom resources are allocated and then the prices attached to goods and services. Since allocation of resources is a relevant and critical aspect of the microeconomic theory, it brings in competition among or between firms. This competition then implies that firms or business organisations have to make decisions that will give them a competitive advantage over the other competitors. How is this relevant to this small manufacturing firm? We may ask. These issues are important because of various issues. First, the firm has to produce or manufacture quantity that wills ensure that at least profit is attained. In addition, by manufacturing quantity that is large enough and does not go to waste it becomes possible to gain from the scale of economies where as the quantity of production goes up, the marginal cost of production reduces and this puts the firm at a better place to have a competitive advantage as it becomes possible to adjust prices of the manufactured goods or products based on the costs of production. The aspect of quantity produced is also relevant to the business from another perspective- an external perspective. From the perspective of other competitors, it should be known to the business that as other manufacturers increase their manufacturing output, they also increase their level of influence on the prices of the commodities in the market. In addition, as other entrants come into the market they might not be at the same level of production but with time they are going to boost their output levels and this means that competition from the new entrant will increase with time.
Another perspective that shows how the distinct microeconomic approach is relevant to the firm is through prices. While the pricing of goods headed to the market defines the relationship of the firm with other firms in terms of competition and with customers in terms of purchases made, increase in interest rates is going to have an effect on the raw materials used by the firm to manufacturer its end products and this implies that aspects within the macroeconomic platform affect firms individually and collectively- collectively as industry-wide and individually as individual firm. Another point that that demonstrates the relevance of macroeconomics comes from the aspect of raw materials but now from a different point of view. Macroeconomics deals with evaluation and study of inflation in an economy. When the rate of inflation goes up, the expected occurrence is that prices of raw materials will also shoot and this will in turn have an impact on the prices the company pegs on its end products hence the price it charges the public for the products.
It is evidently recognisable that while microeconomics studies economies studies economics in a smaller but detailed scale and macroeconomics provides a broader perspective in the study economics, the two areas are much interrelated in the way they influence this business in its operations within the industry.
How markets operate in a market economy
The basic and fundamental principle that rules supreme in a market economy is that consumer demand for goods and services is the main force that drives the prices of commodities and the production levels. Therefore, in a market economy, as the demand for particular commodities increase, the prices for those particular commodities also increase. Meanwhile, supply must also increase to satiate the increasing demand and this leads to increase in production as firms produce more to balance the increased demand. However, as the quantities of production increase and supply of the commodities in the market outweigh the demand, firms start struggling or having an increased competition to have customers or buyers. This leads to firms using price and other factors as points of earning the loyalty of buyers.
How a market economy may impact on your business
The overall impact of a market economy on the business relates to general decision making allocation of limited resources such as labour and capital. Since these decisions are going to have an impact on what price the firm can charge, it is important that the firm develops a model for making decisions, which increases the competitive advantage in the market. For that reason, a market economy to a limit to the ability of the firm to control the prices of commodities it takes to the market. This is because the prices of these commodities will be influenced solely by demand and supply. Therefore, it will force the firm to ensure that it operates at optimal production level aimed at maximizing output but still minimising costs of production. If the firm does not control the costs of production such that these costs go so much high then it might be unable to cope with competition where the prices in the market are lower than the firm can charge. This is true since it would imply that the firm would be operating at a loss. Meanwhile, the nature of market economy also affects the ability of the firm to offer discounts. What this implies is that if the firm finds a level of production that provides it with an opportunity to manufacture at lower costs such that when it offers discounts to consumers or buyers it might increase its competitive advantage while still making economic profit, then it would give discounts to buyers of its products.
Internal decisions will also be affected by the way market economy operates since what matters mostly will be the ability to increase the demand of the company’s products by buyers and have a market share that ensures the firm stays in business. To achieve this, the firm must be wary of the internal policies relating to labour and its cost, where it buys its raw materials and how much it will be willing to pay for the raw materials as the maximum price since all these will go into affecting the company’s ability to influence price or affix it based on market changes of demand and supply. If the business makes decisions that put it in a situation where it can only offer a particular non-flexible price for its products then it might be put in a very tight and bad position in the market.
Lastly, market economy will dictate what level of production the business adopts at any particular time. Since the level of production by this firm and other similar competitors in the industry will determine the supply side of the industry, the level of production must be controlled the level of demand. It is easy to see that all these effects have an implication on the firm’s profitability, its profit margin and by extension its ability to pay the accruing interests on its debts. In addition, the impact this would have on the firm’s marketing efforts might be devastating if the resultant impact means there is no money to be channelled to marketing and advertising.
The relationship between costs, supply and production
The relationship between costs, supply and production in the manufacturing largely varies depending on the volume being manufactured, whether there is any part of the manufacturing process that is outsourced and the degree of automation involved in the manufacturing process. In addition, that relationship also depends on the amount of human supervision that is needed in the production process and the level of that supervision.
With regard to factors of production that create a relationship between costs, supply and production, the basic factors of production include capital, labour and supply costs. In this case, capital comprises the equipment, cash reserves and the physical location of the manufacturing plant. On the other hand, labour is the cost of manpower used in production including its amount. This labour must be calculated for extent to which it is capable of bringing a finished product to the market. Costs of labour encompass, not just the physical labour, but it must also incorporate any labour related to supervision regarding the manufacture of the product, the related costs of salaries of positions such as supervisors or managers, drivers who carry out deliveries, costs attached to warehouse supervision, administrative assistance costs and marketing costs.
Supply costs have a big relationship with the production because they relate to the costs that are necessary to bringing materials to the productions point. Similarly, subcontractor costs or costs originating from outsourced work, they are both considered as supply costs. This means that the higher the supply costs the higher the production costs. In this aspect, supply costs comprise any cost that is needed to bring the materials to the production level. In respect to the outsourced work, or subcontractor work the costs associated to this are considered supply costs. Up to now, it should be evident that the higher the supply costs the higher the production costs. In addition, the business should try to reduce the subcontracting costs because it can be seen that this is one way of reducing the production costs.
Volume of production also has a significant relationship with costs since the volume of production. Generally, the higher the volume of production the lower the cost per unit of production, in terms of what suppliers frequently offer. Volume of business is also another significant point that offers the point of relationship between the cost, supply and production. This can only come out clearly when two companies are brought the picture for comparison. Assuming that in addition to our medium-size manufacturing company there is another manufacturing firm that produces its commodities
The nature and determinants of national income and the relevance of this for your business
The impact of trends and fluctuations in the UK economy on your business
Exchange rate fluctuations-
Interest rates fluctuations-
Fluctuations in inflation-
The potential impact of the international economic environment on your business