Microeconomics principles and applications

Microeconomics is a branch of economics that focuses on how individuals, firms and households decide how to allocate limited resources in a buy and sell-based market environment. Specifically, microeconomics focuses on studying how these decisions and behaviors affect supply and demand of the product and service. This effect thus determines such factors as price and how a price determines the supply and demand of the goods and services.

The purpose of microeconomics is to study the market mechanisms that create relative prices of goods and services and the allocation of limited resources among many possible users. Microeconomics is particularly interested in analyzing market failures, specifically where a market fails to produce efficient results and, from this information, finding the ideal conditions needed to create perfect competition and therefore avoid market failure.

Microeconomics operates on the theory of supply and demand, assuming that markets are perfectly competitive. In other words, microeconomics assumes that there are equal buyers as there are sellers in the market and that neither have the ability to significantly influence prices of goods and services.

However, this basic assumption is often incorrect in that in real life some individual buyers or sellers or even groups of buyers or groups of sellers do in fact have the ability to influence prices. Microeconomics focuses on creating the ideally perfect market.

Microeconomics starts at the foundation that all firms are following rational decision making and therefore will produce at a profit-maximizing output. Based off this assumption, microeconomics examines profit in one of four categories:

business is making economic profit when its average total cost is less than the price of each additional product produced at the profit-maximizing output.

A business is making a normal profit when its economic profit is equal to zero, or when the average total cost is equal to the price at the profit-maximizing output.

A business is in a loss-minimizing condition when the price is between average total cost and average variable cost at the profit-maximizing output. In such a situation, the firm should still continue to produce because its loss would actually be greater if it ceased production.

A business should cease production when the price is below the average variable cost at the profit-maximizing output.

To better understand how microeconomics studies production, this paper will examine the Microsoft Corporation. The Microsoft Corporation falls into the first category, or the economic profit category. Thus, their economic profit is equal to the quantity output multiplied by the difference between the average total cost and the price. Being most concerned with supply and demand, microeconomics focuses on the concept of market failure, or the situation where either supply or demand does not equal one another. By a microeconomic definition, market failure does not mean that a particular market has ceased function but instead means only that the current market situation does not efficiently organize production or allocate goods and services to consumers.

There are four types, or causes, of market failure. Monopolies exist where a single buyer or seller is able to exert significant influence over prices or output. To minimize such market failures, antitrust regulations are implemented. In recent years, Microsoft has been accused of violating antitrust regulations and thus being a monopoly. The accusation is that Microsoft, as a seller, is able to control the market place, thus reducing competition and creating a market failure.

Specifically, the decision of United States v. Microsoft, issued on April 3, 2000, called the company an "abusive monopoly." The suit arose out of the merging of Microsoft and Internet Explorer (created when the company bought out Netscape). The decision further required that the company split into two separate units, one for its windows-based features and one for its Internet-based features. However, part of this ruling was subsequently overturned by a federal appeals court and the case was eventually settled with the U.S. Department of Justice in 2001. The settlement requires Microsoft to share its appliation programming interfaces with third-party companies and appoint a panel of three individuals who will have full access to all the company's systems, records and source codes for a period of five years in order to ensure compliance. Interestingly, the settlement does not require Microsoft from refraining from tying its other software with Windows in the future.