Login with Facebook

Interaction of Consumer and Firm Choices in Markets

For an economy to thrive, there is a need for the three most important aspects – consumer, firm, and the markets – to coexist in perfect order. It is not normal that one will be superior to another, or where one can be better than the other. Decisions made by one affects all the others—the theory of microeconomy of built on the principles of decision making by firms and individuals. If there is a problem in the market, say, for instance, lending, chances of involved firms raising interest rates are very high. And this means consumers have to decide whether to borrow or not. Many will be afraid to engage in such deals, which leads the firms to produce less and make fewer profits. In many instances, markets have failed not because there is a lack of natural resources, but because they did not relate well with other aspects of an economy.

Consumer and firm decisions

We are always faced decisions in our daily existence, which leads consumers to give up one product for the other. Many economic experts have, in the past, commented that there is nothing like a ‘free lunch’ when it comes to making decisions. If you decide to take one way, it means you have had to sacrifice the other. Take, for instance, a family that has been saving for years. It reaches a point when they have to decide between buying a new car they really need, or going on a fancy vacation they have been planning for. Referring back to the great recession of the 2007/2008 financial crisis, the whole world went into a state of financial constrains as markets collapsed. The rate of unemployed spiked as prices of commodities surged. As such, families had to make decisions choosing the most important needs over all others. It all began with the collapse in the housing and financial markets, which, at the time, were booming, they may not have anticipated that bubble to turn things to the worst.

And because of this, there was an increase in the consumption of certain goods, while others declined. For instance, it was recorded that more people visited groceries more than they did restaurant because they chose to eat from home as a way of saving on some chase. This brings us to the question of how households make decisions. Why would the family choose a car and forego the trip or vice versa?

The biggest challenge to consumer decisions is scarcity. In the modern world, human needs often exceed natural resources that are supposed to quench these needs. Economics states that humans’ needs are infinite, while resources are finite. This means, there is never enough for most people. One may want, for instance, to buy a house, but they will need money for this. They will have to work to earn money, whereby job opportunities are always limited. This makes it very hard to make decisions. Hence, consumers have to draw what is called a budget line.

In this case, it is all about calculating what a consumer can afford. And to get this, you have a factor in the budget constraint of the individual. Let’s think, for instance, of a Mr. X who loves to buy shirts and food from fancy restaurants. In one instance, this individual has $50. A single movie costs $10, and a place of the food he eats costs $25. On a chart with food, the x-axis, and the movies on the y-axis, a budget line can be drawn to show all the possible combinations of each product. For instance, if he has only the $50 to spend, he can by two plates of means at the expense of the movies, or buy five movies at the cost of his favorite meals. Mr. X can also choose to balance the two.

The point is, consumers are always faced with tough decisions, which are based on current financial situations and the prices of goods. However, it is a must that they leave one product and chooses another. There are never any two ways about it, considering budget lines don’t allow them to pick anything beyond what they can afford.

Firm and markets decisions

Let us refer back to the development of automobiles. Back in 1908, there was a great revolution in the industry that greatly changed the cause of history. Note that the industry had been around since the 15th century owing to the drawings of Leonardo Da Vince. Late on, Karl Benz invented the first gas-powered automobile in 1885, which opened ways for more improvements in 1893 and the years that followed.

However, the greatest revolution came in 1903 when Henry Ford opened an assembly line for cars. Before this, cars were only a luxury reserved for the rich and elite in society – no one else could afford them. But all this changed during this period because the assembly line greatly reduced the production costs and the time it would take to make a single car. Now cars were more affordable, leading to the popularity of Model T, which were all over the market by 1927.

In the case of producer decisions, it depends on the status of a market. A perfectly competitive market is where everything is on the same line. There is no producer who is great than the other, they are price takers, and consumers have all the information about the products’ features. But such a market only exists in theory. If it were so, the producers would make a decision based on:

- If the price is greater than marginal cost, in which case they will produce more.

- If the price is less than marginal cost, in which case they will produce less.

- If the price is equal to marginal cost, in which case they will maximize profits.

Now, every firm is faced with different categories of costs. And these costs vary depending on the industry. In the case of short-run expenditure, the firm is faced with fixed costs, which cannot be altered. They include things like costs for purchasing a working an industrial building; this is called sunken cost. Apart from this, there is also the cost of buying machinery research and development market. There is also what we call variable costs, which, as you may have already guessed, can be altered. For instance, if a firm’s production increases, they may have to hire more workers or by more machines. That means they will be spending more.

Just like consumers, a producer is also faced with challenging situations where they have to make decisions. And these decisions are also based on different factors, including, and majorly, the rate of consumption. If we assume other factors like the competition are obsolete, then we can say a firm will produce as much as they are able to sell completely. They will keep watching their inventory so that there are not many products sitting on the shelves.

Where is the equilibrium?

A firm is defined as the business of a company. In a basic marketplace, there is a transaction between households and firms. In any case, a firm looks at production factors like land, labor, and capital to make goods for households. And they come in different ways, including corporations, partnerships, and collectives, among others. When studying the theory of a firm, economists attempt to describe, explain, and predict the general appearance of a firm. They will, therefore, look at its existence, behavior, and market status.

Not every market and society is linked to a firm. Consider production in the medieval times, for instance, where the most process was don’t by skilled individual artisans. They would loosely get organized into guilds, or through farmers who rented some land. In this case, trade was mostly among individuals.

Today, firms have become a more prevalent and perhaps reliable alternative to exchange between individuals. This is true, especially when referring to a non-market environment. Consider the labor market; for instance, firms cannot just only engage in production when they have the option of firing and hiring workers based on demand and supply. No one can deny there are many advantages of consolidation for efficiency; however, there is an underlying concept where including operational aspects can have positive impacts on a firm.

Firms play a central role in economic development, and not only for themselves but for the wider society. It is, therefore, important to separate the business from the individual who started it. Buy so doing, the funding, insurance, and liability of the firm do not fall on the individual. This separation also allows for the application of certain laws and regulations pertaining to the operation of a firm.

Note that there is a detailed implication of a firm and how it relates to individuals and the community. It may be hard to understand the complexity of this relation, but you can only take that a firm plays a central role in an economic structure.

Why firms transact

Firms make a profit by transacting. Ronald Coase states that people are only motivated to organize their firm’s production when there is an excellent percentage of transaction cost on the market than the cost within the fire. He recorded that a firm may be connected markets not under its control but due to how its internal resources are organized. Inside a firm, the complexity of a market is taken over by the entrepreneur who takes care of productions. He wonders, therefore, why firms cannot use internal prices through the production process, or perhaps we just get one big firm to handle the entire economy, based on alternative production ways.

In his though on the establishment of a firm, he says the major purpose for starting a company is to avoid some transaction costs that come with using the price mechanism. Processes like identifying relevant prices, which may be eliminated at the expense of striking a deal and drafting applicable contracts for every transaction, lets a company decide the mode of action.

Trade and profit

The main reason why consumers and producers trade is because the process helps each to gain a better position in society. Economists may measure the benefit of a transaction based on how much the producer benefits. On the other hand, the consumer profits by utilizing the product, and the extend of profit gained is measured so.

The consumer also benefits from trade because from consumer surplus, which is the monetary profit when a consumer is able to buy a product with far less than the original price. This happens a lot when firms place discounts on such products. Understand that the consumer may be willing to pay the highest price, but are glad to get the lowest option.

The opposite producer surplus. This is the excess a producer receives when they sell at a higher market price than the least, they could. When it comes to making decisions, the allocation of resources is described at Pareto. This the decision of making one individual better leave the other worse.

In summary, there is always a profit in every transaction. Both the consumer and the producer receive gains, either as direct profits, and consumer or producer surplus. When you these surpluses on a standard supply and demand curve, you can see the amount of they have gained. Sometimes, a consumer may be willing to buy two products at slightly the equilibrium price, yet they end up paying for each unit at the equilibrium, without any addition.


According to economists, firms that are always seeking to make profits make the difference between total revenue and total cost count. On the other hand, consumers seek to get the best out utility; hence they can be described as total satisfaction than the from goods and services or actions. If there is efficiency in the allocation of resources, then consumers and producers will gain maximum surplus. Marketplaces see, to operate haphazardly, and yet they produce efficient outcomes. For this reason, marketplaces can promote the common good, and perhaps they create equilibrium.

In an economic system, nothing seems to be more important than efficiency. And even though the different notions of a system may be complimentary, it is clear that consumers, firmsConsumer and Firm Choices in Markets, and markets meet at a specific point vital to their economy.

Author: James Hamilton

Need a custom

We will write it for you.
Order now

Free Essay Examples

Free essays:

All you need to know about Neuroendocrinology
All you need to know about Big data management
All you need to know about digital special effects
All you need to know Technical Writing?
Basics the Game Theory in Cryptoeconomics
Business innovation ideas for making money
Biosensors for cancer diagnosis
Business Analysis: Pricing strategies and Demand Curve
Cognitive Computing- How does Cognitive Computing work?
Consciousness: characteristics and peculiarities
Conservation Economics
Cybersecurity in business: challenges, risks, and practices
Demographic trends and how they affect Economic Growth
Dance as an art form and entertainment
Discrimination Economics
Determinants of Wages
Everything you need to know about short-term memory
Economic and Policy Impacts of Demographics
Ethics: an essay on the understanding of evil
Emotions: what are they? Theories explained
Factors of Demographic Data Collection
Factors Affecting Purchasing Behavior
Financial Statement Analysis
Factors Influencing Interest and Exchange Rates
Government's Intervention in The Labor Market
Guide on the Pathways of the nervous system
Game theory in microeconomics
Globalization: definition, causes, social impact and risks
How Relativism Promotes Pluralism and Tolerance
How to use the audience’s feedback to write a news report
History of silent cinema
How news report can be strengthened through multimedia
Introduction to Population Problems
Imperfect Information and Asymmetric Information
Imperfect Information in Insurance
Introduction to Labor Markets
Journalism: What is News?
Journalism: Broadcast media and Television Presenters
Journalism: Sources of News
Journalism and Law
Key Determinants of National Income
Key Factors That Affect Pricing Decisions
Kinetic models in biology and Related fields
Know about the different forms of traditional African dances
Latest technology trends
Latest dance trends
Magnetoencephalography (MEG)
Microeconomic Analysis to the Demand for Labor
Neuromuscular disorders
National Economies, Fluctuation, and Responses to Fluctuations
Neurotransmitters: what they are and different types
Nanomedicines to target tumors
Objections to utilitarianism
Organizational motivation and its effects
Overcoming Hiring Challenges for Nonprofit Organization
Population Demographics
Recurrent neural networks (RNN) for speech detection
Russian School of Mathematics
Research and Development
Risk Sharing in Insurance and Asset Markets
Stochastic optimization methods in deep learning?
Structure of the nervous system
Structure of a Corporation
Schizoaffective disorder: how to live better with it
The climate change denial
The techniques of basic cinematography
The Endosymbiotic Theory
The Role of Internal Audit in Corporate Risk Management
Utilitarianism Vs. Kantianism
Understanding Auctions and Auction Theory: Part 2
Various theoretical perspectives of sociology
Virtual reality, what it is and how it works
What are the linear models in machine learning?
What is Convolutional Neural Network
4 Facts about Origin of Mathematics!
5 techniques to create an animation
10 emerging technologies according to World Economic Forum
10 strategies to maximize corporate profits
3d Model Of Building
6 Medical Technologies that revolutionized the healthcare in 2020
All you need to know about the ACA Code of ethics
Architecture and Democracy: An Introduction
Architecture and Democracy: Democratic Values
Architecture and Democracy: Democratic Procedures
All You Need to Know About a Synthesis Essay
An essential guide to understanding Film Theory
Application of Artificial Intelligence in Cyber Security
Applications of electrical engineering
Augmented reality: what it is, how it works, examples
Advantages And Disadvantages Of Social Networking
All you need to know about Cryptography
Applications of astrophysical science
All you need to know about architecture engineering
Applications of geological engineering
Artificial intelligence and medicine: an increasingly close relationship
An insight into Computational Biology
ACA code of conduct
A Rose for Emily
Applications of Mathematics in daily life
Architecture mistakes to avoid
All you need to know about Toxicology
All you need to know about Holistic Medicine
All you need to know about linguistics
An introduction to Linguistics and its subfields
All you need to know about Anxiety disorder
All you need to know about Drones
A Brief Insight into Political Science
Assumptions related to feminism
All you need to know about Byzantine emperors
All you need to know about labour economics
An insight into xenobots -the first-ever robots
An ultimate guide about Biomaterials
A Comprehensive Introduction to the Mona Lisa
Analysis methods of Transport through biological membranes
An ultimate guide about biochemical reactions
Analysis of brain signals
Artificial Gene Synthesis
Application to synthetic biology of CAD methods
All you need to know about metabolic pathways
Applications of BIOMEMS
All you need to know about the epidemiology
Asian vs. western leadership styles
All you need to know about Smart prosthesis
Analysis of Economy: Output of Goods and Services (GNP), and GDP on Economic success
A Guide to Pricing Strategies
An Overview Of Economic Studies
Analysis of Fiscal and Monetary Policies
Analysis of Business Cycles
Analysis of Consumption and Investment
A Look into Regression Analysis
Analysis of Household's Consumption and Savings Behavior
All you need to know about Capital Budgeting
All you need to know about risk management
Art looted in wartime.
Appropriate use of Data in Economics
All you need to know about reaction kinetics?
A historical overview of Financial Crises
All you need to know about management discipline?
An insight into the error-correction models
All you need to know about Data visualization
All you need to know about Work-family balance
All you need to know Technical Writing?
All you need to know about digital special effects
All you need to know about Big data management
All you need to know about Neuroendocrinology
How to Write a Personal Essay
Housing Needs in America
How to Write a Description Essay
How to Create an Excellent Scholarship Essay?
How to write a cause and effect essay
How to Hire the Best Essay Writing Service Provider?
How to Write a College Application Essay?
How to get the most out of your English lectures
How to write Expository Essay
How to succeed in your psychology class?
How to Write an Academic Essay in the Shortest Time?
History of Journalism
How Different Sectors are Using Artificial intelligence (AI)
How to write an informative essay
How to deliver persuasive essays?
How to Give a Convincing Presentation
How to write an essay on leadership?
Historical Art Still Around Today
Humanoid robot: what it is, how it works and price
History of Chemistry
Healthcare Advanced Computer Power: Robotics, Medical Imaging, and More
Healthcare AI: Game Changers for Medical Decision-Making and Remote Patient Monitoring
How to understand different types of English
How to Cope with Chronic Pain
How African American choreographers and dancers have influenced American dance
How mobile robot can do in logistics or in production
How To Become a Successful Entrepreneur
History of the Philosophy of Feminism
How is the climate changing?
How to Track Your Content Marketing ROI
How to Gun control In the USA?
Historical and contemporary role of labour in the modern world
How breast cancers are classified?
How the cells of our body communicate?
How the Lymphatic System Works?
How Digestive System Works
How to complete your capstone projects effectively?
How to write a research project
Healthcare technologies that help patients with better self-management
How to choose the topic of the senior capstone project
How to make your business survive at economic crisis
How can immigrants blend in the American society?
How does the economics of war affect society?
Hate speech on social media.
How to Build an Economic Model
How to start a healthcare startup?
How can financial illiteracy harm you?
How cancer is developed - Cancer biology
How to define the Enterprise Value
How to conduct economic research?
How women can manage sexual harassment
How to use quotes in your news reports?
How news report can be strengthened through multimedia
History of silent cinema
How to use the audience’s feedback to write a news report
How Relativism Promotes Pluralism and Tolerance
Introduction to Urban Studies
Importance of dance in education
InMoov: how to build an open source humanoid robot
Importance of KYC verification to making the Blockchain secure
Importance of Rhythm
Importance of dance student evaluation
I/O control methods -types and explanations
Identity theft: what to do?
Introduction to Utilitarianism
Importance of 3d Modelling in Architecture
Importance of online journalism
Image processing in medical diagnosis
Introduction to USA Politics
Introduction to Comparative Politics
International Relations as a Major in Political Science
Importance of modern trade policy
Introduction to Journalism
Introduction to Writing a TV Script
Introduction of Microfabrication techniques
Introduction to Microeconomics
Interaction of Consumer and Firm Choices in Markets
Importance of corporate sustainability
Issues in International Monetary Macroeconomics
Introduction to Statistics and Data for Economics
Introduction to Data and Probability for Economics
Introduction to the Game Theory
Introduction to Econometrics
Introduction to Economic Information
Introduction to Market Equilibrium
Introduction to Economic Models and Application
Introduction to Empirical Research
Introduction to Econometric Data
Importance of Critical Thinking, Principles, and Goals
Introduction to Identification and Causal inferences
Introduction to Econometric Application
Intermediaries and Government in Financial Crisis
Importance and seven principles of quality management
Illiteracy in the USA
Introduction to Economics of Law
Introduction to Coase Theorem
Introduction to Social Choice and Incarceration
Intellectual Property and Product Liability
Investment in Human Capital
Introduction to Labor Markets
Imperfect Information in Insurance
Imperfect Information and Asymmetric Information
Introduction to Population Problems
The Looming Energy Crisis in America
Top benefits of performance-based engineering
The More Languages You Know, The More Times You Are a Man
Things to consider while writing an Argumentative Essay
Top Ways to Improve Your Academic Writing Skills
Tips to Excel in Creative Writing
The origins of films in the early 19th century
Top career options in Architecture
The Elevator Pitch
Top finance trends 2020
The basic Structure and functionality of robots
The Way to Success
The election system of the President in the United States of America
Two-party System in United States of America
Top trends in urban design
The history and theory of African American filmmaking
Top benefits of creative writing
Tinnitus Guide: Common Symptoms and Treatment Options
The language of dance
The digital image processing management
Top famous politicians of the World
Top methods of political science!
The history of the feminist movement
The blood flow in cardiovascular system - Biofluid Mechanics
The best of Leonardo Da Vinci
The Structure and Function of Macromolecules
The structure of cell: a research on the bricks of the human body!
Tissue and organ construction: Adhesion and recognition between cells
The kinetics of the transformation processes
The Modeling of Biological Systems
Tips for writing a great thesis statement
The Defense mechanisms against infections
The impact of the technological innovations in medicine
Top journalism trends to know about
The relation between mass media & politics
Theranostics: Diagnosis and Care through Nanoparticles
The practical Applications of X-rays
The applications of Ultrasound in medicine
Transfer mechanisms of genetic information in Bacteria
The regulation of cellular metabolism in the diagnosis
The Principles of MRI Contrast agents
The technical basis of optical coherence imaging
The New Media: Emerging Trends
The Structure of Interest Rates and the Yield Curve
Technological perspectives and reflections of neural engineering
Types of bioreactors and their applications
The Role of Government Policy in Improving Economic Outcomes
Types of corporate responsibility
The Role of IMF in International Monetary Macroeconomics
Tools for investment decision making
The concept of Organizational Culture and its applications
The Conduct of Monetary and Fiscal Policy
The Basics of Financial Accelerator Models
Tips for labeling medical devices- Medical Entrepreneurship
The different medical imaging techniques
The Economics of Uncertainty – Introduction
Theories of Public Policy
The Game Theory in Social Media
The political theory of Thomas Hobbes
The Use of Law on Economics and Vice Versa
The Role of Internal Audit in Corporate Risk Management
The Endosymbiotic Theory
The techniques of basic cinematography
The climate change denial
What is a Definition Essay?
What are diagnostic essays?
What is the relation between art structural engineering?
What is a Narrative Essay
What are robotics and intelligence systems?
What are the benefits of studying health sciences?
What is artificial intelligence and why it matters?
What is comparative Literature?
Why study neuroscience
What is Wi-Fi and how does it works
What is French history famous for?
What are Humanistic Studies?
What is covered in Biophysics?
What is modern journalism?
What is Virtualization? Benefits & Applications
What are modern public relations?
What is plasma physics?
What is teacher preparation?
What is rapid prototyping for 3D printing?
What is contemporary European Politics?
Why should you learn American Ballet?
What is engineering physics?
What is the purpose of African American Literature?
Ways to learn the Rhythm
What is digital art used for?
What are Enzymes and how do they work
Who is the father of political science?
Why Study Political Science - Job?
What is the Philosophy of Feminism?
What is a quantum computer?
Ways B2B Startups Streamline Their Conversion Strategies
Why do biomedical signals need processing?
What are the long term effects of climate change?
Why study labour relations
What is Holoprosencephaly?
What is antisocial disorder?
What are the important principles of evolution?
What is the cytoplasm and its function?
What is biopolymers?
What Makes a Good Leader
Women empowerment in modern generation
What is the history of political thought?
What is Gene recombination
What is synthetic biology
What is business cost analysis?
What is Inflation
What are the consequences of unemployment?
What is lithotripsy and its types?
What is transition elastography?
What is the purpose of deep brain stimulation?
What is a Brain-Computer Interface (BCI)
What is neuroethics?
What is Market and Supply and Demand
What is optogenetics?
What are the techniques to record brain activity?
What happens if the interest rate increases?
What is immunotherapy?
What is the economic role of the financial market?
What are the factors behind illegal immigration?
What is the lymphocyte activation?
What is financial market and its types?
What is the structure of financial markets?
What are the methods of measuring business performance?
What is the Credit market?
What is business ethics and code of ethics
What are the Causes of financial instability?
What is MBA with Concentrations
What is regenerative medicine?
What is Population ecology?
What is Microfinance: evolution, and practices?
What is biotechnology and its applications?
What are Workplace diversity and its benefits?
What is the difference between a leader and a manager?
What Is Branding and best branding Business strategies?
Why are microelectronics important?
What are biologic drugs.
What is the Foreign Exchange market?
What is the role of scientific research in times of crisis?
What are the risks of international trade?
What is financial management?
What is gene therapy?
What is education economics?
What is regression analysis, and why should you use it?
What Is Technology Marketing And How Should It Work?
What is Management Accounting
What are the methods of valuation of companies?
What is Immune System and Immunotherapy?
What is big data analytics?
What is the 7 layers of OSI model?
What is Neuroplasticity?
What are Sculpture art and its types?
What are the different genres of films?
What is Transcranial magnetic stimulation (TMS)?
What is TES-Transcranial electrical stimulation?
What is Relativism?
What is Vaccine skepticism, and what to do about it?
What happens in the brain when learning?
What is the deep neural network?
What is Convolutional Neural Network
What are the linear models in machine learning?