MICROECONOMICS Essay Example | Topics and Well Written Essays - 1750 words

MICROECONOMICS - Essay Example It must be noted here that for the private firms, the altitude of the supply curve from the horizontal axis determines the minimum price (average) at which a specific quantity must be sold so that supplier would be able to cover the variable cost. He cannot afford to sell at any less value. It is vital to understand the meaning of demand and supply as it has been used in the micro economics models. It must be perceived as the flow of inventory, inwards for supply and outwards for demand. Demand and supply do not have a direct link between them but it is the market that decides their levels. Finding the equilibrium price A unique price exists in the market that would establish perfect equilibrium between demand and supply known as equilibrium price. This price is a great leveller for both buyers and suppliers and there is least scope for manipulation of prices driven by greed in a long run. In a perfect market, there is an equilibrium quantity that exists for the equilibrium price and either way shifts in the value of this equilibrium due to misallocation of resources (whether too few scarce resources are being used or too many scarce resources are being used) would result in dead- weight loss. ... It is more or less automatic. Trouble in the public sector This is in complete contrast to what happens in the public sector. When it comes to public services which are run by governments, there is hardly any interaction of demand and supply curve as there is absence of ‘feedback’ factor. So there is no automatic adjustment of the prices as government rely on taxes for covering the cost that is incurred in rendering these services and consumers hardly have any choice. This is why misallocation of resources is a commonplace under government led enterprises and it would be better if governments restrain themselves from getting engaged into non vital activities. Whenever government tries to control the price either by deciding the floor price or the upper cap, it runs the risk of misallocation of resources. It would result in ‘dead - weight losses and could get worse. Analysing the effects of minimum wage law indicates that it fails to achieve the objectives which it was originally devised for. It increases the supply of the unskilled labour in the market and at the same time decreasing their demand. It fails to serve the poor, worsens the problem of unemployment in the long run and increases the burden over the taxpayer in an unjustified manner. Even the ‘earned income tax credit’ program has the similar consequences though it is not as bad as minimum wage law. Under both the schemes, government seems to address the symptoms and not the root causes of the problem. It is relevant to suggest here that instead of attempting to control the prices directly, it would be much better to influence the market. Policies must be such that they help