Microeconomic Theory and Demand Function, Essay Example

Microeconomics mainly studies on firms and households decisions on how limited resources are allocated in a typical market which services and goods are being sold and bought. It concentrates on how their behavior and decisions affects demand and supply of the services or goods. Such effects of on supply and demand in turn determine prices of the commodities or services.

The producer’s behavior is controlled by the demand of the goods or services which they offer. Increase in demand makes them increase their production or even raise the prices of the commodities to as to control their flow in the market (Whinston Et al. 2005). Change in pricing makes the customer not to buy many goods hence the few which are in supply they would be accessible to those who need it and are willing to much more.

The explanation is of importance to 21^st Century markets because the theory involves activities which deal with inflation, growth, unemployment and any economic policies being implemented and they relate to the issues under review. The relevance is important because 21^st century markets are highly being affected by the inflation, growth, unemployment and any economic policies being implemented in local and international market (Rubinstein, 2006).

According to Porter, (2008) the porters five forces model consists of bargaining power of customers and suppliers, competition rivalry between suppliers and threat of substitute products and services and entry of new products in the market. This model is derived from microeconomics theory as it stresses on how power of buyers influence pricing of the suppliers/producers and the power of suppliers as well determine prices and control supply in the market to maintain pricing. Suppliers practice of rivalry competitiveness also influence pricing of good and services as each suppler strives to woo more customers and have a larger control of market share by lowering their prices (Whinston, Et al. 2005). While, entry of new entrants in the market and availability of substitute products mainly increases supply in the market and lower the price of the good or services.

Demand function plays a major role in niche marketing as it enables the producer to be able to develop a strong product or service in the chosen niches. According to Lake, (2010) niche market gives the producer power as it allows one to define who they are marketing to. With such knowledge on who a producer is marketing to it easy to relate to demand function of the indentified niche to promote the goods and services much better to the target market.

Market structures are control to market strategy for example; oligopoly markets which the markets are being dominated by few large suppliers, the suppliers because they are few and large they would block the market by being in to agreements on how to trade. Such strategies of formation of cartels would make new entrants in the market and survival of small suppliers difficult to penetrate the market.

References

Lake, L. (2010). Defining Your Niche Market. Retrieved on February 06, 2010 from http://marketing.about.com/od/strategytutorials/a/defineyourniche.htm

Porter, M. (2008). The Five Competitive Forces that Shape Strategy. Harvard Business Review, p.86.

Rubinstein, A. (2006). Microeconomic Theory: The Economic Agent. Princeton, NJ: Princeton University Press

Whinston, M., Green , J & Mas-Colell, A. (2005).Andreu Mas-Colell (Author) Microeconomic Theory. Oxford: Oxford University Press