The Importance Of Microeconomics In Business
The prices of the firm are determined by the equilibrium between aggregate demand and supply. However, aggregate expenditure refers to the amount spent and which shows the actual demand, current prices and aggregate supply. In a normal market, when the aggregate expenditure in the economy is less than aggregate output, the level of inventories will increase and prices fall. In order to save costs, firms in the economy will lower the level of production, prices and reduce its workforce in order to sell their stocks. If the aggregate output is less than potential output, it will create what is commonly referred to as the inflationary gap, which causes the level of inflation and employment to fall. However, if the aggregate expenditure become greater than aggregate output, the inventories will decline resulting to hiring of more workers and increase in machinery. If the aggregate expenditure is higher than potential output in the economy, then firm will pay higher prices for producing one unit of output. This will result to what is commonly referred to as the expansionary output gap or demand pull inflation. In the short run, aggregate expenditure will be affected by the aggregate demand in the …show more content…
Aggregate demand curve can shift due to the following factors; changes in expenditure, wealth effect, changes in income of foreigners and changes in expectations. Money
Money is essential in microeconomics because it influences almost every variable. Money has different functions such as the medium of exchange. Money is used as a measure of value. The major advantage of money acting as a measure of value is its ability to easily be converted into other goods. However, when money is used as a measure of value in certain circumstance, it does generate interest income for instance a current account. Money supply refers to available cash in the country.
Banks represent the financial systems in a country that contribute significantly toward economic development and improving the living standards of people. They also include clearing and settlement systems that are used to facilitate trade and channeling financial resources between borrowers and savers. Banks specializes on receiving deposit and assessing the credit worthiness of the borrower before issuing money. Banks are very critical in the economy because they ensure money circulations hence affecting the economic development of a