The Essence of Microeconomics

THE IMPORTANCE OF MICROECONOMICS

1. New Businesses o Entrepreneurs create businesses by purchasing and utilizing factors of production. In order to estimate the potential return on investment (ROI) of those factors of production, entrepreneurs must have a basic grasp of microeconomic concepts: supply, demand, cost, profit. Without such a grasp, it is impossible to know how much a particular good can be sold for in a particular area. Furthermore, without a grasp of costs and earnings, it is impossible to estimate ROI, thus leading to poor financial investments. 2. Marketing o Marketing people must have a basic understanding of microeconomics so that they can set prices for products and decide in which markets to sell those products. A comprehension of microeconomics enables, say, a computer company marketing manager to advise the CEO to start allowing installment payments in case of an economic downturn, thus recovering business from customers hit hard by the recession. A marketing manager without a sense of economics might not realize that such options are available. 3. Management o Managers must understand the concept of ROI when setting salaries for new hires, as employees are supposed to generate profits for the company. Managers must also have a grasp of microeconomics when making general budget decisions; a project shouldn't be given a budget that exceeds what the project is expected to produce in future earnings. These kinds of decisions are based on the microeconomic concepts of cost, revenue and profit. 4. Finance and Accounting o Finance people probably use microeconomics more than anyone else in business. Financial analysts use microeconomic and macroeconomic theories in order to forecast the future value of financial assets -- e.g., gold, stocks, bonds -- and other investments. For example, a securities analyst might use microeconomic data to determine the change in income of people in a given country, then use the microeconomic concept of "price elasticity of demand" -- the responsiveness of consumer demand to changes in consumer income -- to determine whether the price of a given asset will rise or fall in that country. Accountants use financial ratios that are derived from microeconomics.