In microeconomics, a particular industry is a separate branch of a larger economy that makes a closely related group of products, raw materials, or services. For instance, one may refer to the furniture industry, the service industry, or the automobile industry.
In microeconomics study, industries are studied as a series of interrelated activities. There is one major unit of this microeconomy: the firm. A firm has its own capital and liabilities, and it can be either large or small. It can make a profit or loss, be a small business or a large corporation.
In the firm’s business cycle, there is one central sector which can be called the production sector, and another which can be called the consumption sector. The production sector includes all aspects of the company’s business which deals with the physical production processes (like machinery, labor, and raw materials) and its financial resources which are used in the production process such as stock, bank loans, etc.
The demand for a firm’s products, or the level of production required to meet demand, determines its size and also determines the firm’s balance sheet. The demand for a firm’s products can be directly measured using data collected from the market. On the other hand, a firm’s financial resources can only be measured indirectly by the market, in the form of price changes.
Firms usually belong to one of two main categories of economies: perfect economies and disequilibrium economies. Each type of economy has one primary sector, one secondary sector, and two intersecting sectors. In a perfect economy, all of the firms in the economy have exactly the same level of income, and the prices of goods and services in the market reflect all economic relationships among them. A disequilibrium economy is the opposite of a perfect economy.
Perfect economies are characterized by perfectly competitive markets, which allow firms to sell their products to the market at the same price. These markets also give every firm the ability to earn income and the ability to absorb costs, both of which will affect the firm’s profit margin and its growth rate. A disequilibrium economy is characterized by a market which has two distinct segments, each of which has a higher cost of production relative to other firms. in order to attract potential buyers. but a lower profit margin, due to the lower level of investment in production. The two segments, with the lower production costs but high profit margins, compete for the available investment income of the market, causing the prices to fall to a level at which no firm can earn profit, which leads to a state of equilibrium between the two segments.
Firms in disequilibrium economies may have more than one segment in each segment, with all of them functioning in some way, though at different magnitudes. A perfect economy may have industries in both segments, while in disequilibrium economies only one segment may be active at any given time. For example, a disequilibrium economy may have both automobile and furniture industries in the same industry segment, and a perfect economy may only have car industry.
There are two types of economies, perfect and disequilibrium. The perfect economy and the disequilibrium economy are both interdependent; that is, they both depend on the other to operate.
In the perfect economy, all industries produce, sell and distribute products or services of equal quality. In a disequilibrium economy, however, the primary segment produces and distributes products and services of low quality, while the secondary segment produces and distributes products of high quality. In both cases, the result is lower quality.
In a disequilibrium economy, the result of this process is to reduce market prices to a level where no firm can earn profit. However, in a perfect economy the result of this process is to increase the price enough to enable only a small number of firms to earn profit, while all other firms absorb costs. and have to cut costs even more.
In a perfect economy, the market price of an industry is in perfect competition with all industries within it. Because of this situation, the market price of an industry is expected to increase continuously, which increases income for all firms within it. Thus, while the industry suffers and declines, the overall economic value of the market rises.