Essentials Of Economics

Essentials of Economics

Introduction:

Microeconomics is the branch of economics that concerns itself with the processes that firm’s, households and individuals concerns themselves in allocating limited resources. In this sense microeconomics scrutinizes how these decisions affect the demand and supply schedules and helps determine not only the prices but also how these prices influence the supply and demand of goods and services in any given market segment.

On the other hand, Macroeconomics is a sub-discipline in the field of economics. It concerns it self with the structure, performance and the behaviors of national economies. It seeks to find out the determinants of the aggregate movements within the economy.

Macroeconomics gives specific attention to inflation, unemployment, international trade, investments and the national income.

Helium is an inert gas. As thus, it has very many industrial uses. Its main industrial use that is related to this analysis is its use in the manufacture of gas balloons, in place of hydrogen since it is much more manageable. Helium in this market can be used either for commercial purposes or for making toy gas balloons. If there were a new health report claiming that inhaling helium reduces the desire for consuming sugar then the following short run changes would be expected.

Assuming that the supply of helium remains constant then we expect the demand for helium to move from dd1- dd2. This is because more people will have the desire to reduce their sugar

Essentials of Economics

intake. In addition, the price of helium will also go up. However, this will only be the case under only two conditions. First if the price of sugar is relatively higher than that of helium and secondly if the health of the consumers will significantly improve e.g. through the decrease of sugar related illnesses like diabetes. Regardless of this, the overall effect will have to be dependent on the availability of close substitutes that would have the same effect on the price.

Once this happens to the helium market, the following will happen to the market for sugar.

Assuming that all other factors remain constant, the market for sugar will be greatly affected. Domestically consumed sugar has no close substitutes. If this report was indeed credible and it had the effect of reducing the desire for sugar consumption then the following scenarios would be expected.

If the substitution effect applies and consumers substitute the consumption of sugar with the purchase of more helium based gas balloons then the market for sugar will have the following effects. As the diagram above shows once, people reduce their consumption of sugar, in the short run we do not expect to have any supply reductions. Due to this reason then we expect the demand for sugar to go down. This is indicated in the diagram above as the shift from dd1-dd2. Because of this, we also expect the price of sugar to fall to a new equilibrium below the former equilibrium.

THE MARKET FOR BALLOONS:

We expect the market for balloons to have mixed reactions. Since the balloons are helium based and the industrial price of helium has risen, we expect the price for the balloons to rise. This is compounded further by the increasing demand. Because of these two scenarios, we expect the price of the helium filled balloons to be relatively high within the short run.

Essentials of Economics

Conclusion:

Microeconomics or short run analysis does not give us the entire picture. Thus, it is necessary to look at some macroeconomic issues. If we make the assumption that, the price of helium is relatively low even after the above-discussed increment then we needs to look at some of these issues. For instance, the government may choose to increase taxation either on the gas balloons or on the helium. This could have the effect of changing the price and demand patterns not only in the short run but also in the long run. In addition, in a free market we expect mechanisms to equilibrate the market within the immediate long run.

References:

Hadjimichalakis M. (1982) Modern Economics, Prentice Hall Publishers, New Jersey

Paul Anthony Samuelson (1964) Economics, McGraw-Hill publishers, USA