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Microeconomic Concepts

Free «Microeconomic Concepts» Essay Sample


Microeconomics is the study of the behavior of firms and individual consumers and their decisions when considering limited resources. This idea applies to a market situation where firms are selling goods while consumers are buying these goods. As the firms try to maximize their profits, the consumers aim at maximizing their utility. Therefore, an equilibrium must be developed at the point where the firms as well as consumers maximize their utility. The study of microeconomics assesses how the consumers’ and producers’ decisions affect the demand and supply of a good/service. This paper discusses the basic microeconomic concepts with the help of hats and hoodies and determines how they help with the attainment of microeconomic goals.

Demand and Supply of Hats and Hoodies

Hats and hoodies are basic clothing. The difference comes in when the hat or hoody is branded or secondhand. A branded hat or hoody is considered a normal good, while a secondhand one is an inferior good (Wells & Krugman, 2014). The demand for branded clothes increases as the income of a consumer expands, assuming that the price is constant. When the income reduces, the consumer will demand less branded clothes. On the other hand, secondhand clothes are considered inferior good, because as consumers’ income increases, they tend to demand less secondhand clothes, meaning they now choose brands. When the income reduces, they tend to demand more secondhand clothes and less brands (Pindyck & Rubinfield, 2015).

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The suppliers of hats and hoodies have decisions to make when it comes to selling their goods. The suppliers of branded hats and hoodies will sell more of these offerings in the areas or neighborhoods where the occupants have relatively high incomes. These people can afford expensive clothes since their disposable income is high. Supplying secondhand clothes in such localities may not be profitable, since very few people will purchase them (Wells & Krugman, 2014). On the other hand, a supplier of secondhand hats and hoodies should offer these goods in areas/localities/neighborhoods where the citizens have relatively low incomes. These people will definitely choose secondhand clothes due to the lower price as compared to the more expensive branded offerings. Therefore, the supplier has to particular decisions with these factors in mind when seeking to maximize profits (Pindyck & Rubinfield, 2015).

Equilibrium of Demand and Supply of Hats and Hoodies

An equilibrium occurs when the demand and supply are equal. On the graph, this is the point where the demand and supply curves intersect. Ideally, the equilibrium price facilitates the achievement of the microeconomic goal of efficiency. It happens because at this point, both the supplier and the consumer attain maximum satisfaction from the available resources on either side, and, hence, the goal of stability is achieved (Pindyck & Rubinfield, 2015).

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Elasticities of Demand and Supply of Hats and Hoodies

The elasticity of demand for hats and hoodies depends on whether the item is a normal good or an inferior good. For new branded hats and hoodies (normal goods), the income elasticity of demand is positive, because as the income of the consumer increases, more branded hats and hoodies are demanded. When the income reduces, the demand for branded clothes also falls down (Wells & Krugman, 2014). On the other hand, for secondhand hats and hoodies (inferior goods), the income elasticity of demand is negative. As the consumers’ income increases, they demand less secondhand clothes, while with reducing income, they demand more secondhand clothes. All these processes happen if the price is held constant. Focusing on the price elasticity of demand, income is held constant. For new branded hats and hoodies (normal goods), the price elasticity of demand is negative. More specifically, as the price of the hat/hoody increases, consumers demands less of the hats/hoodies, all other factors held constant. However, when the price for normal good falls, the consumer will demand more new clothes (Wells & Krugman, 2014).

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Cost of Production

The production of hats and hoodies has a lot of economic aspects attached to it. First, there is the cost of the factors of production. One of these factors is labor. There are people employed in the factories, who produce these clothes. These employees need to be paid wages and their management must receive salaries. This is a major cost incurred in the production process. There is also the cost of raw materials and their delivery. These hats and hoodies require materials such as strings and other textile products for them to be produced. Therefore, it is important to include the cost of these raw materials when calculating the cost of production of hats and hoodies (Pindyck & Rubinfield, 2015). Moreover, there are such costs as land, technology and capital used in the production process. All these inputs are summed up to arrive at the total cost of producing outfits for sale. When the cost of production is high, suppliers and producers have to set high prices for the final products so that they can recover the cost of production and maximize income to shareholders (Pindyck & Rubinfield, 2015).

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Market Structure

The market structure for the sale of hats and hoodies may differ from place to place. In some regions, there are perfectly competitive markets, which means that sellers offer homogenous hats and hoodies. In such markets, the prices are relatively similar, because if one seller decides to increase price for his/her hats/hoodies, then consumers will have an option of buying from the other sellers who offer lower prices. In addition, if one seller decides to reduce the price for his/her hats and hoodies, then consumers will flock to his/her shop and hence the sales of this producer will increase. As a result, a change in price causes a more than proportionate change in the number of hats and hoodies demanded by consumers (Wells & Krugman, 2014).

If the market is monopolistic and has a single seller, the situation is different. The monopolist has ultimate control over the price of the hats and hoodies he/she is selling, because there are no competitors. In such circumstances, the price of a hat or hoody will be relatively higher than that in the perfectly competitive market. The seller will be a price maker, and he/she will have control over the market (Pindyck & Rubinfield, 2015).

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Under monopolistic competition, there will be many firms selling hats and hoodies, but these items will be slightly differentiated. It means that there will be no single firm with complete control over the market. On the other hand, in an oligopoly, there will be a relatively smaller number of firms, but these firms will collectively control the majority of the market of hats and hoodies. Each firm will have to resort to rigorous advertising techniques in order to ensure that it makes sales, since the items will be only slightly differentiated (Pindyck & Rubinfield, 2015).


In a nutshell, the above discussion demonstrates that there are numerous microeconomic concepts, which apply to the purchase and sale of any good. With the help of a concrete example of the trade of hats and hoodies, it is evident that each market has different functionality depending on its structure. Moreover, price and income as well as demand and supply of these goods also compose the microeconomic concepts, which serve to ensure equal and efficient sale and trade in market with the hats and hoodies.

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