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economic assignment

By Tommy Reed,2014-12-25 23:10
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economic assignment about demand and supply, Production Possibility Frontier,equlibrium price and equlibrium quantity

Economic assignment

Student’s name:

Cleo

    Part A

    Production Possibility Frontier(PPF), that is a graph which shows an economy is able to produce the maximum level of its production or combined productions efficiently if the available technology and the fully resources are given.

    Suppose, for instance, a country uses all of its available resources to

    make only two goods——computers and books. If the economy put all of resources available in computer industry, the economy will produce 500 computers and no books. If all reasons were used in publishing new books, the economy will produce 3000 books without computers. If the resources were divided by two industries, it could produce350 computers and 200 books, 300 computers and 3000 books, 150 computers and 4500 books and so on. Depending on these informations, the production prossibility frontier can be drawn.

    Figure 1

    A500

    B350

    CproductionN300possibility

    froniter

    M

    D150

    Quantity of computers

    E03000200045005000

    Quantity of books

    Drpending on the figure 1, if the economy produced at point C and it wants to more to the point D, it means that the output of books will rise to 4500 from 3000, the opportunity cost of that is lost output of computers, falling to 150 from 300.

    It can be seen that at points A or B or C or anywhere else on the frontier combinations of output can be produced; when points inside the frontier such as the point B, it can be say that an inefficient outcome at the point B, the reasons for this may be widespread unemployment .ect; the economy is not able to be at points outside the frontier because of scarce resources.

    However, if there will be a rise in the quantity of resources for producing, or if the quantity of available resources has an increase, the economic gowth can happen, and figure 2 shows the effect on the PPF of an economy. The economy could move to the right in the future because of this economic growth. As a result, an increase in productive potential of the economy shifts outwards of the PPF.

    Figure 2

    A

    BN

    C

    MDQuantity of good 2

    E

    O

    Quantity of good 1

    The production possibility frontier below to see the choices of the allocation of resources which can be made. PPF shows the point at the way of producing goods or services most effectively by an economy. The PPF in figure 1 and figure 2 have been drawn bowed out, sometimes PPF can be a straight line——Figure 3. The tradeoff between the two

    goods deponds on as productive in one use compared to another.

    Figure 3

    Coats(RMB)250

    200

    150

    100200, 100

    50

    0

    0100200300400500

    Hats(RMB)

    The figure 3 shows the amount of time a worker requires to produce 10 Yuan RMB of hats and clothes. Assumed that a worker works 40 hours per week, he prodeces 10 Yuan RMB of coats in 4 hours and 10 Yuan RMB of hats in 2 hours, so he can make 100 Yuan RMB of coats with no hats or 200 Yuan RMB of hats with no coats.

    Part B

    1. A substitute is such a good that can replace by another to satisfy a want. When one good has a rise in its price, this will lead its substitute good to increase in price and demand. In this case, most coffee drinkers add non-dairy whitener to coffee instead adding milk, because of an increase in costs of milk; simultaneously, the demand for non-whitener will rise. Therefore, whitener is a substitute for milk.

    2.

    Figure 4

    Milk Non-whitener

    PPD1D2S1DS2S

    P1P1

    P2P2

    OOQ2Q1QQ1Q2Q

    From figure 4, It can be seen that the supply of milk decreases consequent its price increases, this leads to the quantity demanded falls. In turn, there is a rise in the demand for non-whitener when people buy it instead of milk. The demand curve for non-whitener move to the right, the result of

    this is an increase in its price and a rise in its quantity purchased.

    3

    Figure 5(a)

    Non-whitener Corn

    PPD1D2D1D2SS

    P1P1

    P2P2

    OOQ1Q2QQ1Q2Q

    Figure 5(a) shows a rise in demand for non-whitener this leads to an increase in quantity purchased and sold. Non-whitener is produced using corn syrup which is made from corn. So, non-whitener manufactures will rise their demand for corn,the demand curve for corn move to D from D. This leads to corns price increases from P 121

    to P and an increase in corns quantity purchased from Qto Q. 212

    Figure 5(b)

    Corn Corn

    PPD1D2D1D2SS

    P1P1

    P2P2

    OOQ2Q1Q1Q2QQ

Figure 5(b) describes a rise in the demand of corn leads to its price and

    quantity bought and sold increase. Therefore, there will be a movement along the demand curve from the point p1 to the point P2 and the quantity demanded of corn is going to fall.

    Figure 5(d)

    Corn Meat

    PSDDS2S1P

    P1

    P1P2P2

    OQ1Q2QQ2Q1OQ

    In figure 5(d) there is a fall in quantity demanded of corn, this means that there will be a decrease in the quantity supplied of corn to livestock by

    livestock producer. So the quantity supplied of meat(livestocks) will fall and lead to a rise in the price and a fall in the quantity bought and sold. 4.

    Figure 6

    PS1S2D1

    P1

    P2

    OQ2Q1Q

    From figuer 6, we can see a decrease in the supply of coffee because of the effect of bad weather. The supply of coffee is at the point S and the 1

    demand of it is at point D with the normal weather, the equilibrium price is P and equilibrium quantity is Q. The supply curve will move to the 22

    left from S to S, this will lead to the price increase to P from P and a 21 12

    fall in quantity demanded of coffee from Q to Q. 21

    Part C

    1.

    Figure 7

    Price of orange

    Quantity of orange

    The demand curve is a graph which describes the relationship between price and quantity demanded. When price rises(or falls), the quantity demanded will fall(or rise), so the gradient of demand curve is negative if the curve is a straight line. The supply curve shows the interaction of quantity supplied and price. When price decreases(or increases), the quantity supplied will increase(or decrease), thus the slop of supply curve is positive when it is linear. The intersection of demand and supply curve is equlibrium.

    2. Equlibrium of a market occurs at the point where the demand curve insects the supply curve. The price at a level that quantity demanded can be equal to quantity supplied is equlibrium price,the quantity at where

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