Words: 419
Significant fields of study in microeconomics include general equilibrium, markets under asymmetric information, choice under uncertainty and economic applications of game theory. Also considered is the elasticity of products within the market system. The fundamentals of Microeconomics lies in the analysis of the preference relations. Preference relations are defined simply to be a set of different choices that an actor can choose (a k-cell metric space) that actors can also compare between any two bundles of choices ( completeness of the relationship. In order to analyze the problem further, the assumption of transitivity is added to the mix. These two assumptions of completeness and transitivity that is imposed upon the preference relations are what is termed rationality. Microeconomic analysis are conducted mainly through imposition of additional constraints on the preference relations or even relaxation of the above stated assumptions (most often transitivity) although such relaxation makes the problem much harder to analyze.
The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). The graph depicts a right-shift in demand from ODL to 02 along with the consequent increase in price and quantity required to reach a new market-clearing equilibrium point on the supply curve (S). The theory of supply and demand usually assumes that markets are perfectly nominative.
This implies that there are many buyers and sellers in the market and none of them have the capacity to significantly influence prices of goods and services. In many real-life transactions, the assumption fails because some individual buyers or sellers have the ability to influence prices. Quite often, a sophisticated analysis is required to understand the demand-supply equation of a good model. However, the theory works well in situations meeting these assumptions. Mainstream economics does not assume a priori that markets are preferable to other forms of social organization.
In fact, much analysis is devoted to cases where so-called market failures lead to resource allocation that is suboptimal by some standard (defense spending is the classic example, profitable to all for use but not directly profitable for anyone to finance). In such cases, economists may attempt to find policies that avoid waste, either directly by government control, indirectly by regulation that induces market participants to act in a manner consistent with optimal welfare, or by creating “missing markets” to enable efficient trading where none had previously existed.