I am a student of Business Administration, but Microeconomics is one of the many favorite topics for me.
Well, microeconomics, it's ....it's all about scarcity. It studies human behavior as a relationship between ends and scarce means. It's about how people make their decisions to consume, and firms make their decision to produce.
There are basically two types of actors in the economy: consumers and producers.
The consumers are usually constrained by their limited wealth or budget. This is something we call budget constraint and subject to this constraint they choose the set of goods. That's what we call utility maximization. The consumers, therefore, maximize their utility subject to the budget constraint.
Firms, on the other hand, will maximize profits. Their goal is to make as much profit as possible. However, that is going to be subject to both the demands of consumers and input costs. Here, consumers are gonna consider, what does it cost what do I like? ...but firms little more complicated, they have got to consider what do consumers want? and how do I make what they want? So, they have to consider what consumers want me to make and what's it going to cost me to produce that good? And how do I combine both to make the most profits?
So, what factor resolves all these problems ?
Prices in the economy resolves all of these problems. Consumers and firms will interact in a market and out of that marketplace will emerge a set of prices. And those prices will allow firms and consumers to make the relevant decisions.
Let's a consider a example. Let's think about the development of a product, say a new smartphone is going to hit the the market. So, when the company is making a smartphone they have to ask what consumers want this? So consumers had to decide given their limited resources. So they had to choose if they want that product on the high price or the low price. Say, the consumers are willing to pay a high price for that product. Now, the firm will have to depend on what it cost to make them. So, they have to allocate what are the inputs needed to make a smartphone based on the various resources that are needed to make that smartphone. So, whether to produce that product will depend on what people are willing to pay for it and how to make that product will depend on the prices that firms have to pay to manufacture that product. So, the price will determines all the problems for example what gets produce? how it is produce? and who gets it?
Off course, there are lots of cases where price won't be able to decide all these things but yeah price is one key state variable that will determines the scenario in many situations.
