Microeconomics: concepts and applications

Micro Economics

How prominent is the competitive ideal in our current economy and how useful is it as a microeconomic principle?

The competitive model is the basic foundation of our economic system. Where, it will serve as an effective way of providing consumers, with the products they need at affordable prices; while helping suppliers to be motivated to deliver these products to consumers (profit motive). As an economic principal, this is useful in ensuring that there is a large enough supply of various goods and services to meet demand. A good example of this can be seen with Wal-Mart. Where, the lower prices that they offer to consumers, on a variety of products will cause their overall bottom line to increase. This is because, the lower prices that they charge in comparison with their competitors, are enticing consumers to purchase the items they need from the company. (Elster, 1999, pp. 173-179)

How is rational consumer assumption used in microeconomic analyses? How realistic is it? Do people act rationally enough to make the assumption useful?

The rational consumer theory is used to show how consumers are acting, based upon the underlying economic conditions. Where, they will spend their money rationally (over the course of time), to meet consumer demand. This is used in microeconomics to provide a foundation, as to how consumers will more than likely be spending their money. In reality, this economic model is flawed. The reason why is: most consumers do not act rationally in their spending. As a result, they will often make buying decisions, based upon excitement or emotions, rather than logic. Because of this fact, it proves that the assumption that all consumer will act rationally all the time is flawed. (Mankiw, 1998, pg. 257)

How do the (often competing) objectives of equity and efficiency fit into this framework and can the micro economist ever hope to put it all into perspective? Certainly the competitive ideal is a mixed bag, but it has a long and venerable history. Is it deserved?

Economics and efficiency will play an interconnected role. Where, the two items will play a balance in helping to promote long-term economic growth of particular country. For economists, the way to put the two factors into perspective is: to have flexibility when looking at how both will impact economic growth. The mixed history of both is deserved. This is because there have been specific examples where lower taxes (equity), can lead to above average economic growth. At the same time, there are examples where higher taxes have helped economic growth.

Part II

How can competition be fostered in the international framework when corporate revenues are sometimes larger than the nation states expected to regulate them and when size alone can mean that failure can rock the whole international economic framework?