Importance of Microeconomics in Business

Running head: IMPORTANCE OF MICROECONOMICS IN BUSINESS
Importance of Microeconomics in Business
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IMPORTANCE OF MICROECONOMICS IN BUSINESS1
Table of Contents
Introduction......................................................................................................................................2
Microeconomic theories impacting business...................................................................................2
Theory of production and cost.....................................................................................................2
Theory of demand and supply.....................................................................................................3
Theory of market structure..........................................................................................................4
Production possibility theory.......................................................................................................5
Microeconomic theories and small business...................................................................................6
Conclusion.......................................................................................................................................7
Reference.........................................................................................................................................8

IMPORTANCE OF MICROECONOMICS IN BUSINESS2
Introduction
Managing a business firm is a critical task as it requires knowledge of different theories
that are necessary to make the firm successfully. Among such theories, microeconomic theories
are most important as these theories impact every decision of a firm related to production.
Theories of microeconomics gives the notion of understanding cost of production, price of
products and stricture of market a business belongs to. All these parts are necessary for a firm to
understand all the aspects of business. This report aims to analyse the impact of microeconomic
theories on a small business firm.
Microeconomic theories impacting business
The basic theories of microeconomics that small business entrepreneur needs to consider
in order to run the business successfully are theory of production and cost, theory of demand and
supply and theory of market structure. All these can be together regarded as theory of firm
because all are directly related to operation of business firm.
Theory of production and cost
Production of any service or good is the basis of any business firm. The production
enables a firm to gain market and thereby helps in making profit. Production of a goods depends
majorly on two factors that are labour and capital. These are known as production factors. A
good is produced by combination of the two. The efficient use of production factors are
necessary to produce more by using minimum possible resources (Karl et al. 2019). Less is the
amount of factors used by a firm to produce a certain amount of goods makes the firm more
productively efficient. Lower the cost more will be firms’ ability to earn profit. There various
cost that a firm need to consider while producing a good and they are marginal cost, average