Modern Business Microeconomics

Question: Describe about the Modern Business Microeconomics. Answer: Introduction As per the given situation, the lone supplier of the good is me. The objective is to realise maximum revenue by bringing about relevant changes in the product price. In this regard, it is imperative to note the following relation. Total Revenue = Price * Quantity Also, it is noteworthy, that price and quantity tend to be inversely related for normal goods in accordance with the demand curve (Pindyck and Rubinfeld, 2011). Analysis The various situations where the price increase or decrease must be introduced are discussed below. Price Increase of product The equilibrium price of the product is determined by the demand and supply forces. In the given case, due to being the only supplier, all supply is within my control. Thus, for a given level of supply, price should be increased if there is a shortage in the supply i.e. demand is greater than the supply. This situation is represented in the diagram below (Mankiw, 2014). Additionally, price may also be increased when the demand for the product is inelastic as it would lead to an increase in the overall revenue (Pindyck and Rubinfeld, 2011). Price decrease of product The equilibrium price of the product is determined by the demand and supply forces.. Thus, for a given level of supply, price should be decreased if there is a surplus in the supply i.e. supply is greater than the demand. This situation is represented in the diagram below. Additionally, price may also be decreased when the demand for the product is elastic as it would lead to an increase in the overall revenue (Mankiw, 2014). Conclusion Hence, it may be concluded that based upon underlying price elasticity and also the demand supply mismatch, the price may be increased or decreased. 2. Adam Smith advocated the international trade theory based on absolute advantage which supported the idea that a nation which is more efficient in term of lower production cost should produce the good while the less efficient nation should import the same. This may present a notion that an efficient nation is self-sufficient since it does not need to import any goods from outside (Koutsoyiannis, 2013). However, this may not be true if we take into consideration the comparative advantage model propounded by Ricardo. He advocated that since the economic resources available with every nation is limited, hence in relation to a particular product, comparative advantage would lie with a country with a lower value of opportunity cost. This concept could be mathematically demonstrated using the following data (Krugman and Wells, 2013). Let the man-hours required for unit candle production in country A and country B are 110 and 100 respectively. Further, the man-hours required for unit oil production in country A and country B are 130 and 90 respectively. The given data clearly establishes that B has absolute advantage in relation to production of both oil and candle. Candles opportunity cost for country A = 110/130 = 11/13 unit of oil Candles opportunity cost for country B = 100/90 = 10/9 unit of oil It is apparent that for candle, comparative advantage lies with A due to the lesser value of opportunity cost. As a result, country B would gain by specialising at production of oil while country A should produce candle for reaping mutual gains (Koutsoyiannis, 2013). References Koutsoyiannis, A. (2013). Modern Macroeconomics, London: Palgrave McMillan Krugman, P. and Wells, G. (2013), Macroeconomics, London: Worth Publishers Mankiw, G. (2014), Microeconomics, London: Worth Publishers Pindyck, R. and Rubinfeld, D. (2011), Microeconomics, London: Prentice-Hall Publications