Production Possibilities and Opportunity Cost
a
i)
Figure 1: Production possibility curve of Joan
ii)
Opportunity cost is said to be increasing when people has to sacrifice more and more units of one commodity to have one additional unit of other (Mankiw 2014). For Joan, increasing grades involves sacrifice of more and more hours of work per week. For example, first 20 percent grade has an opportunity cost of 5 work hours. The opportunity cost for grade of 40, 60, 80 are 10, 15 and 30 respectively which shows an increase in opportunity cost for a higher and higher grade.
iii)
A constant opportunity cost for grades produce a linear production possibility curve as shown in figure 2
Figure 2: Constant opportunity cost and production possibility curve
The first PPF of concave shape is more likely to be obtained in real world. As resources are not perfect substitute of each other moving resources from one alternative to another increases the opportunity cost and hence makes production possibility to be concave (Bumas 2015).
iv.
Points below the plotted curve represent feasible but inefficient allocation of Joan’s time between grades and work hours.
The only way to push combination of grade and work hours is to increase the available time for allocating more time for both grades and work hours by reducing time spent for leisure.
Scarcity refers to the one of the fundamental problem of economics derived from limited resources. The limited means are used for fulfilling unlimited wants of humans. Society faces trade-off among available choices. Because of a goo growing weather, Australia produced huge amount of wheat crop. The plentiful production of wheat however does not address the scarcity problem of Australia in regards to wheat. Ample production is a short term phenomenon while scarcity is a much bigger aspect. One year production has nothing to do with scarcity problem (Friedman 2017).
Figure 3: Evaluation of an increase in productive capacity
Doubling the capacity of solar power almost doubles the ability to supply power. The increase in supply cause supply curve to shift outward to S’S’. Given the demand the increased supply increase equilibrium supply of solar power while reduces equilibrium price.
The lower price of solar power resulted from increased capacity increase demand for solar power in the long run. This shifts the demand curve to the right (demand curve shifts from DD to D’D’). Three possible changes can occur in the market depending on magnitude of change in demand and supply.
Figure 4: Demand change in greater than supply change
Figure 5: Demand change in smaller than supply change
Figure 6: Change in demand equals change in supply
Figure 7: Impact of tax in coal-fired industry
A proposed tax in coal-fired industry reduces the effective supply leading to a leftward shift in the supply curve to S’S’ (Gillespie 2014). Because of tax price of coal-fired electricity now increases to P’ while market quantity reduces to Q’.
Figure 8: Evaluation of tax in solar power industry
Scarcity and Wheat Production
In response to increased price of coal fired electricity because of imposed tax, demand for solar powered electricity increases. This causes demand curve in the solar power industry to shift outward leading to an expansion of both price and quantity in the industry.
The difference between maximum willing price of a consumer actual price that the consumer pays for the good is called consumer surplus. Surplus earned by producers because of the difference between market price and minimum supply price is called producer surplus.
Figure 9: Consumer and Producer Surplus
b
If the solar power capacity increases, then market price of solar power decreases. The lower price increases consumer surplus as shown by the bigger triangle A’P’E’. Increase in productive capacity implies a greater efficiency (Waldman and Jensen 2016). This results in a greater cost efficiency leading to an increase in production surplus E’P’C’.
Figure 10: Change in productive capacity and surplus
The objective statement based on testable and reliable facts is called positive statement. The positive economic statement can be proved or disproved with support of the theories and factual evident. Normative statement on the other hand is subjective and requires a value judgement. These are based upon opinion of individual and cannot be validated with factual or theoretical support (Tresch 2014).
The statement that business tax cut will be good for business and worker can be considered as a positive statement. Imposition of tax reduces incentive to hard work as a significant proportion of earned reward has to be paid for paying tax. Reduction in tax thus increases welfare of business and workers and is good for both of them
4
a
|
Price |
Quantity Demanded |
Total Revenue |
Percentage change in price |
Percentage change quantity demanded |
Elasticity Value |
Assessment of Elasticity |
|
0.50 |
16 |
8 |
||||
|
1.00 |
13 |
13 |
66.67% |
-20.69% |
-0.31 |
Relatively inelastic |
|
1.50 |
10 |
15 |
40.00% |
-26.09% |
-0.65 |
Relatively inelastic |
|
2.00 |
7 |
14 |
28.57% |
-35.29% |
-1.24 |
Relatively elastic |
|
2.50 |
4 |
10 |
22.22% |
-54.55% |
-2.45 |
Relatively elastic |
|
3.00 |
1 |
3 |
18.18% |
-120.00% |
-6.60 |
Highly Elastic |
b
The price elasticity of demand for hot doughnut is likely to be more elastic in summer as compared to that in winter. Because of lesser demand of hot doughnuts in summer people can easily adjust their demand for hot doughnuts in summer than that in winter. This makes demand more elastic in summer (Moulin 2014).
For addictive product like cigarette, people generally have a relatively inelastic demand because of their inability to alter demand habit in response to price.
a
i.
|
Output |
Total Fixed Cost |
Total Variable Cost |
Total Cost |
Average Total Cost |
Marginal Cost |
Total Revenue |
Average Revenue |
Marginal Revenue |
Profit |
|
0 |
100.00 |
0.00 |
100.00 |
0 |
|||||
|
120.00 |
150 |
||||||||
|
1 |
100.00 |
120.00 |
220.00 |
220 |
150 |
150 |
-70.00 |
||
|
80.00 |
150 |
||||||||
|
2 |
100.00 |
200.00 |
300.00 |
150 |
300 |
150 |
0.00 |
||
|
90.00 |
150 |
||||||||
|
3 |
100.00 |
290.00 |
390.00 |
130 |
450 |
150 |
60.00 |
||
|
140.00 |
150 |
||||||||
|
4 |
100.00 |
430.00 |
530.00 |
132.5 |
600 |
150 |
70.00 |
||
|
160.00 |
150 |
||||||||
|
5 |
100.00 |
590.00 |
690.00 |
138 |
750 |
150 |
60.00 |
ii.
In a perfectly competitive market, the company should sell number of items lying between 4 and 5. This is obtained from the profit maximizing condition in a perfectly competitive market which state optimum output should corresponds to the level where price and marginal cost equalize.
iii.
Figure 11: Average total cost, marginal cost, average revenue and marginal revenue curve
In the production process diminishing return indicates stage of production where addition of one unit of variable results in a smaller marginal increase in output. Corresponding to diminishing return total output still increases but at a decreasing rate, marginal product decreases and marginal cost increases (Maurice and Thomas 2015).
References
Bumas, L.O., 2015. Intermediate Microeconomics: Neoclassical and Factually-oriented Models: Neoclassical and Factually-oriented Models. Routledge.
Friedman, L. S. (2017). The microeconomics of public policy analysis. Princeton University Press.
Gillespie, A., 2014. Foundations of economics. Oxford University Press.
Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.
Maurice, S.C. and Thomas, C., 2015. Managerial Economics. McGraw-Hill Higher Education.
Moulin, H., 2014. Cooperative microeconomics: a game-theoretic introduction (Vol. 313). Princeton University Press.
Tresch, R.W., 2014. Public finance: A normative theory. Academic Press.
Waldman, D. and Jensen, E., 2016. Industrial organization: theory and practice. Routledge.
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