Have you ever thought about all the microeconomics examples that happen in everyday life? Microeconomics is the study of economics with a spotlight on a person's or business's decision-making. Imagine John, whose decision to open a bakery, for example, will be subject to numerous microeconomic decisions. Follow along to understand more about microeconomics with this story-like explanation!
Microeconomics decisions examples
Let's take a look at some examples of microeconomic decisions. In particular, we want to see how microeconomics affects the decisions of entrepreneurs.
We will use the example of John: a young, motivated entrepreneur who wants to start his own bakery.
Fig. 1 - A bakery like the one John wants to start. Source: Yeh Xintong, Unsplash.
All the decisions that John makes about his bakery are microeconomic decisions. They are made with the same principle in mind: cost-benefit analysis. John will weigh the costs of a particular decision against the benefits and will undertake a particular decision only if the economic benefits outweigh the costs, including opportunity costs. Any entrepreneur's journey can be considered a microeconomic decision example in a similar way. Any entrepreneur will be undertaking microeconomic analysis to evaluate all their decisions.
Microeconomic analysis example
Let's take a look at an example of microeconomic analysis through the example of John's decision-making process!
John has to make many decisions before opening his bakery. He has to decide the location, size of the shop, range of rent he can afford, and budget for equipment, utilities, raw materials, advertising, as well as running costs before he starts making profits. Here, John is playing a role of a consumer.
According to his total budget, he will allow a certain amount of funds for every requirement. He has to make decisions rationally. He cannot rent out a shop on the high street and compromise his advertising funds. He has to consider the opportunity cost for each decision.
After considering all factors, John has decided to rent out a shop in a busy locality but with comparatively cheap rent. He chose not to compromise on equipment and raw materials.
The decisions that John undertakes in this part of the process demonstrate consumer rationality.
If you'd like to learn more about it, why not check out our article:
- Consumer Rationality
Let's continue John's story! After scanning through the locality, John spotted that there was only one bakery with a higher price range. The other competitors were supermarkets which sell similar products but at much lower prices.
John decided to advertise his freshly baked products at a rate cheaper than the high-priced bakery but costlier than supermarkets. Some of the bakery products have 'inelastic' demand, and thus, price is determined by the market competition. Another factor that will affect prices at John's bakery is the price of raw materials and utilities. John has considered certain monthly expenses before setting prices for his products.
The decisions that John undertakes in this section demonstrate the price determination of a commodity in a competitive market.
If you'd like to learn more about it, feel free to refer to our article:
- Price Determination in a Competitive Market
Examples of microeconomic issues
Let's take a look at some examples of microeconomic issues that John may encounter whilst pursuing his dream of opening a bakery.
Examples of microeconomic issues: Market failure
What if the bakery market simply fails? It may happen that there is not enough demand for bakery products at a certain price range, or there is a shortage of pastry chefs. This may cause fewer sales at the proposed prices.
You may have noticed that many small businesses suffered during the Covid-19 pandemic. Businesses were not able to provide salaries to employees as there was virtually no production and no sales taking place. In such cases, the government may intervene and help correct the market failure.
Examples of microeconomic issues: Competition vs monopoly
What if the bakery market was not close to a competitive market but rather close to a monopoly or somewhere in between, like an oligopoly?
The UK has a high index of 'ease of doing business.' Considering John is based in London, he has fewer barriers to entry. The UK has a mixed economy, and the government has many rules that protect small business owners from high competition due to big players.
John has uniqueness in his products. He has identified his market segment. Along with serving incoming customers in his bakery, he has also decided to cater to requests from business clients. This differentiation from his competition gives John an advantage in this market.
If the market for bakeries was a monopoly, then John would find it very difficult, if not impossible, to enter the market and compete due to very high barriers to entry. Similarly, in an oligopoly, the existing firms could collude and put the prices way below what John would be able to afford. In both of these cases, there would be market inefficiencies compared to a case of perfect competition.
Examples of microeconomic policies
Let's go over some examples of microeconomic policies that John will have to keep an eye on, which can affect his future business.
The Competition and Markets Authority (CMA) in the UK is established to help consumers to ensure decent competition. The CMA monitors mergers to avoid monopolies, shields customers from unfair market practices and fights against market cartels.
One example of how the CMA works is when it opened an investigation into Amazon and Google's handling of fake reviews on their platforms. This was done to protect consumers' interests and avoid misleading reviews or recommendations on certain products or services.
Anyway, let's return back to our friend - John. John can observe the level of demand for his bakery as well as competitors' prices. If he notices that some competitors or a large bakery chain set prices to undercut John's bakery, or abuse their market power, then it might be a case for a CMA to investigate.
You can read more about how CMA works in our explanation of
- Competition and Markets Authority.
The bakery industry in the UK is not nationalised, and this is why John can become an entrepreneur and open his own bakery. If the industry was nationalised, like the Royal Mail in the UK was, then there would be no way for private businesses to compete in this market. This is because government-owned industries have significant economies of scale and cost absorption.
The Royal Mail was established in 1516 and has operated under government control ever since until its privatisation in 2015. It was argued that the privatisation of the Royal Mail provided significant cost advantages due to increased efficiency and cheaper capital. It was deemed that under private ownership, the Royal Mail would gain a competitive edge, would innovate more, and adapt better to a fast-paced changing environment with more demand for parcel services and greater flexibility required for consumers.
Microeconomics case study examples
Let's take a sneak peek at some microeconomics case study examples!
Although John is not directly in the oil sector, oil prices can significantly affect his future bakery business. How, you might ask? The answer is - fuel costs and supply chain networks. The ingredients for the products he is going to sell may not be available locally. The rise of global oil prices will mean that the cost of those ingredients may increase as well. This can negatively affect the profitability and even feasibility of John's business altogether.
Why might oil prices change? There are a lot of possible reasons, some of them being:
- Supply and Demand
- Market sentiment
- Politics
- Natural disasters
Finally, what if John will not want to work with the suppliers directly but chooses to simply purchase his ingredients from a local supermarket chain? Luckily for him, the UK has a supermarket oligopoly with severe competition. Prices are driven down and are unlikely to vary significantly between the suppliers. There was even a case that the CMA looked at to determine whether there is a sufficient level of competition in the UK grocery industry. The large size of UK supermarkets allows them to be able to stock a variety of groceries, so whatever type of flour that John needs, he will probably find it there!
Now that John has pondered upon a lot of different questions regarding his business, he understands the importance of microeconomic decisions as well as various microeconomic examples. Make sure to check all of them out!
Microeconomics Examples - Key takeaways
- Microeconomic decision examples can be found in everyday life. A great example is that of an entrepreneur opening up a business and all the decisions associated with it.
- When making microeconomic decisions, an individual undergoes a process of microeconomic analysis.
- There are various microeconomic issues that can occur, such as restriction of competition due to oligopolies or monopolies or even market failure in some cases.
- Microeconomic policies are designed to alleviate microeconomic issues. Privatisation, deregulation and competition regulation can affect the market landscape with the aim of levelling out the field for microeconomic decision-making.
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