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Principles of Microeconomics

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Principles-of-Microeconomics

Microeconomics is an integral part of economics that studies the economic relationships between people. It defines the general laws of an economic activity. Microeconomics is a science of decision-making, which researches the behavior of individual economic entities. It gives an indication of the movement of individual prices and deals with a complex communication system called a market mechanism. Microeconomics examines the problem of costs, results, utility, value, and price in the form, in which they are formed directly in a production process and acts of exchange in the market. The purpose of the essay is to examine entrepreneurship, the factors of production, types of elasticity of demand, and the law of demand and supply.

Entrepreneurship

Entrepreneurship is a major component of the economic system of a civilized society. “Entrepreneurship is seen as a fundamentally important part of modern economic and social life”. Entrepreneurship is an independent activity of citizens aimed at making a profit at their risk and financial liability. Any economic task should be appropriate. The purpose of the entrepreneurial activity is the profit maximization as a result of the efforts’ orientation of an entrepreneur on a specific object.

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Private property is a necessary provision for the expansion of entrepreneurship. Privatization is intended to revive the private property as a foundation of entrepreneurship. It should also regenerate competition and provide freedom of action to entrepreneurs and managers. For the development of entrepreneurship, other conditions are necessary as well. They include the stability of the government’s economic and social policies, preferential tax treatment, developed entrepreneurship support infrastructure, the existence of an effective system of intellectual property protection, and the formation of flexible market mechanisms. It is done to improve the business activity of entrepreneurs. Entrepreneurs should be free to enter the foreign market.

The major subject of entrepreneurial activity is entrepreneurs. “The central figure of entrepreneurship research is the entrepreneur”. However, an entrepreneur is not the only subject. In any case, he/she is forced to interact with a consumer as the main contractor, as well as with a state, which in different situations may act as an assistant or an enemy. In the relations between the entrepreneur and the consumer, the first one is classified as an active subject; and, for the consumer, a passive role is peculiar. The main means of the influence for the entrepreneur on the consumer are such factors as the novelty of a product and its conformity with the interests of consumers, quality, price, and availability of goods. The role of the state as a subject of the entrepreneurial process may be different depending on the social conditions and the situation developing in a sphere of business activity.

Entrepreneurship as a special form of economic activity can take place in both the public and private sector. Depending on the content of entrepreneurship as a type of proactive activities designed to make a profit and its relation to the main stages of the reproduction process, there are different types of entrepreneurship. They are such as manufacturing, commercial, financial, intermediary, and insurance.

Thus, entrepreneurship is an independent activity of economic entities. Its purpose is to make a good profit. The efficiency of the enterprise activity is possible only in conditions of the competitive market and personal freedom of an entrepreneur. The development of entrepreneurship leads to an increase in national wealth and prosperity of the state.

Factors of Production

Any company can be viewed as a production system, in which there is the modification of factors of production into a final product or service. The agents of production are the main components used in the production of services, works, and goods. In the economic theory, these factors are everything that by participating in the production process produces, creates, and makes services and goods. Economists usually define three agents of production, i.e. capital, labor, and land. The land is a natural resource. It includes some benefits bestowed by nature used in the production process. Under the land factor, economists understand both the ground with its inherent fertility and mineral reserves, as well as forest and water with all their natural wealth. Capital relates to everything being capable to get income or resources created by people to produce services and goods. “As a production factor, capital cannot be equated to money”. Capital as an agent of production is a material advantage for production purposes. Labor is a purposeful activity of individuals requiring the application of mental and physical efforts, during which they transform objects of nature to meet their needs. This factor includes all types of human activity used in production. The labor agent involves entrepreneurial skills, which are sometimes considered as a separate factor of production.s for the purchase of certain goods and services.

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The fact is that land, labor, and capital cannot create anything, as long as they are not united in a certain proportion by the entrepreneur. For this reason, the activities of entrepreneurs and their abilities are often considered as a separate factor of production. In addition to these three major resources at the level of society, such factor as a common culture often is taken into account. Every agent of production brings income to an owner: land – rent, capital – interest, labor – wages, and entrepreneurial professional skills – good profit.

Elasticity of Demand

Demand and supply are up to numerous factors. Their change attracts a respective shift in demand and supply. The notion of elasticity is connected with this issue. It is the degree of a reaction of one economic variable to changes in another. In the economic theory, there is the elasticity of demand and supply. The elasticity of demand is the percentage correlation between a change in price or income and a change in demand. There are three types of correlation, i.e. income elasticity of demand, cross elasticity, and price elasticity. Income elasticity is a numeric parameter that indicates the reaction of consumers to changes in revenues at constant prices. The value of income elasticity is closely related to the concept of normal goods and goods of inferior quality. For common product, an increase in income stimulates an incline in demand. Since, in this case, the income and demand change in one direction, income elasticity of demand is positive. On the contrary, for the goods of inferior quality, the increase in income is a cause of the decrease in demand. Demand and income are changed in inverse ways. Therefore, in this case, income elasticity is negative.

Cross elasticity describes the sensitivity of demand for one product when changes in prices on the other. “It measures the responsiveness of sales of one commodity to change in the price of another commodity”. Price elasticity shows to what extent consumers react to price changes. It characterizes the behavior of buyers during a shift in the price in one direction or another. If the price reduction leads to a significant increase in demand, this demand is considered to be elastic. If a significant shift in price leads to only a slight change in the number of goods asked, there is a relatively inelastic or just inelastic demand.

Law of Demand

All people feel a need to possess some services and products. At the time of the realization of this necessity, it turns into the demand. The process of realization links the concept of need and demand. Demand is a notion that connects the number of goods bought with sacrifices, which are being necessary to purchase this amount. Demand is a solvency need of a buyer in the product at a given price. It is a form of expression of the needs presented in the market and ensured with the corresponding cash means. Demand serves in the form of needs of the client disposed of monetary funds for the purchase of certain goods and services.

The main feature of demand is that there is a relationship between the market price of the goods and the monetary expression of demand for it. This correlation lies in the fact that the higher the price of the particular product under the other constant conditions, the fewer people will want to buy this good. This relationship is called the law of demand. This law states that there is a negative relationship between the amount of any benefits that people will buy and the price they have to pay for its acquisition.

Except for the price, non-price factors that lead to a change in the value affect demand. First of all, the level of income in society has an influence on demand. Each product has a certain place in the structure of purchases. Therefore, with a change in revenues, the location of a particular product will be changed. In addition, the market size of the goods, i.e. its amount in the sales, also affects demand. If the product comes to the market on a regular basis, the size of the market is constantly increasing. In such a way, buyers will expect the most appropriate price for them. Moreover, the subjective tastes of consumers and their psychology of shopping have an impact on demand. Consumer tastes are formed under the influence of their social environment. Therefore, people of different social strata will have various demands for goods. At the same level of income, some persons will prefer beer while others – books. The individual scale of values is of great importance. On its basis, the consumption preferences are formed.

Law of Supply

In addition to the category of demand, the notion of supply also refers to the main category of the market economy. Supply is a set of goods placed on the market or likely to be produced and represented for sale on prices that are relevant and satisfying commodity producers. The price and quantity of goods are changed and interact unidirectionally. The price increase will cause an incline of the number of products offered for sale. Conversely, a downward trend in prices means the need to reduce the production and supply of goods on the market. The income of sellers and manufacturers is up to the level of market prices for goods. The higher the price is, the more manufacturers want to produce and offer products on the market. In conditions of high prices, the cost of production obtained in the use of both best and worst technologies repaid. With a tendency to lower prices with the worst technologies, manufacturers will be forced to leave the industry. In such a way, the supply of goods will decrease. The main factor affecting supply is the costs of production. “Factors that can change supply and cause the supply curve to shift are the prices of relevant resources, technology, the prices of other goods, the number of sellers, expectations of future prices, taxes and subsidies, and government restrictions”.

Conclusion

The essay has covered such concepts as entrepreneurship, factors of production, types of elasticity of demand, and the law of supply and demand. These concepts are the main characteristics of microeconomics. They define the level of the market development and prosperity of the country. These principles play an indispensable role in achieving high growth and economic success of industrial production.

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