The field of study concerning economics is referred to as economics, and it is broadly divided into microeconomics and macroeconomics.
Microeconomics deals with key economic concepts within a nation, whereas macroeconomics involves learning about mechanisms related to the flow of national and global economies.
Some regard economics as merely an academic pursuit with no further utility, but principles and applications within economics can be thoroughly understood within real economic activities.
This article aims to discuss the practical utility of microeconomics, omitting detailed explanations of its principles.
One of the most important formulas in microeconomics is that businesses can maximize profit when marginal cost (“MC”) and marginal revenue (“MR”) intersect.
Marginal cost refers to the increase in total cost when producing an additional unit of a good. Similarly, marginal revenue is the income gained from producing one more unit of a good.
The point where these two intersect is designated as the profit-maximizing point. Some argue that significant profits can be obtained when marginal costs are minimized.
However, the relationship between marginal cost and marginal revenue should be viewed not from a temporary but from a continuous perspective.
This formula applies not only in theory but also in practical business operations. In the short term, there may be periods where revenue exceeds costs.
However, from a long-term perspective, businesses can maximize profit at the intersection of these two points.
Within microeconomics, there is a concept known as the shutdown policy. If a business falls under this category, it should either temporarily suspend operations for inspection or cease operations before incurring greater losses.
The shutdown policy involves the concepts of average variable cost (“AVC”) and average revenue (“AR”). Average variable cost is the average calculation of the previously mentioned marginal cost.
If average variable costs exceed average revenue, and this situation persists, the business must temporarily halt operations to address issues. Given the current significant losses, it’s a crucial moment to identify problems and seek solutions.
These principles are effectively utilized not only in business operations but also by financial professionals.
To devise effective strategies, it’s essential to compare the difference between average variable costs and average revenue rather than total costs and total revenue.
Understanding the principles of marginal cost is highly beneficial for startups or businesses operating in the long term. When a business enters a prosperous phase, marginal costs initially decrease, but upon reaching a certain point, they naturally increase.
In other words, although there is a tendency for initial investment costs to decrease in the early stages, as businesses or enterprises increase product output and make other investments, marginal costs gradually rise.
This contrasts with the common notion of “as a business stabilizes, expenditure costs will decrease.”
Therefore, these principles can be applied to those who view large-scale businesses from a long-term perspective.
Price elasticity of demand is another important concept that finds ample application in daily life. It measures the extent of changes in demand quantity in response to changes in the price of a good.
For instance, if demand quantity only slightly decreases despite a significant price increase, it is considered inelastic.
Conversely, if demand quantity sharply decreases even with a slight price increase, it is considered elastic. The more elastic the price elasticity of demand, the more sensitive consumers are to price changes.
Such concepts are applicable to luxury brand products and essential goods, making them useful theories for those involved in product planning or sales.
In addition to the aforementioned concepts, there are many other useful concepts within microeconomics.
From characteristics existing in perfectly competitive markets, oligopoly, and monopolistic competition, to practical knowledge such as deadweight loss and Lorenz curve analysis, various concepts can be applied to real-life situations.
Hence, the importance of economics increases for those interested in economics or individuals actively planning to start their own businesses.