Economics concepts and applications

Economics

a) the production possibility curve, which is also referred to as the transformation curve, illustrates the relationship between various levels of production rates between two categories of goods produced in a given period of time. In other words, the production possibility curve reveals the levels of production that can be attained with given amounts of resources.

In our case, the production possibility curve will be described for a country only producing goods and services. The combination of goods and services to be described by the production possibility curve are listed below:

Units of GOODS: A: 0, B: 10, C: 20, D: 30, E: 40, F: 50, G: 60, H: 70, I: 80, J: 90, K: 100.

Units of SERVICES: A: 80, B: 79, C: 77, D: 74, E: 70, F: 65, G: 58, H: 48, I: 35, J: 19, K: 0.

Production Possibility Curve

Point a in the diagram shows that 0 units of goods and 80 units of services can be produced efficiently. Point B. In the diagram shows that 10 units of goods and 79 units of services can be produced efficiently. Point C. In the diagram shows that 20 units of goods and 77 units of services can be produced efficiently. Point D. In the diagram shows that 30 units of goods and 74 units of services can be produced efficiently. Point E. In the diagram shows that 40 units of goods and 70 units of services can be produced efficiently. Point F. In the diagram shows that 50 units of goods and 65 units of services can be produced efficiently. Point G. In the diagram shows that 60 units of goods and 58 units of services can be produced efficiently. Point H. In the diagram shows that 70 units of goods and 48 units of services can be produced efficiently. Point I in the diagram shows that 80 units of goods and 35 units of services can be produced efficiently. Point J. In the diagram shows that 90 units of goods and 19 units of services can be produced efficiently. Point K. In the diagram shows that 100 units of goods and 0 units of services can be produced efficiently.

All the a, B, C, D, E, F, G, H, I, J, K points are located on the curve. This means that these points are productively efficient, but they could be less profitable than other points located on the curve, depending on market demand (Wikipedia, 2008).

A b) at the current moment of time, the country is producing 40 units of goods and 70 units of services. If the country would produce 50 units of goods, it means the production of services would decrease to 65 units. Therefore, the opportunity cost between 40 units of goods and 50 units of goods is 5 units of services.

A c) the opportunity cost includes both explicit costs and implicit costs. Explicit costs consist in dollars paid out for a choice. Implicit costs consist in the value of something sacrificed when no direct payment is made (Hall & Leiberman, 2004).

Therefore, in our case, in order to increase the quantity of goods produced, the country must allocate resources used in producing services, which will lead to decreased production of services. This situation is perfectly illustrated by the figures. As one may observe, as the units of produced goods increases, the number of units of produced services decreases. The maximum number of units of goods can be produced only if no units of services are produced at the same time.

A d) if the country's economy is producing on its production possibility frontier, the opportunity cost cannot be increased, it cannot be exploited in order to increase the production of goods and services. Therefore, in order to increase production, the country's production possibility frontier must be changed. This could take place by increasing the country's production capacity.

This situation can be influenced by quantities of available resources, on the one hand, and by technological progress, on the other hand. In our case, the situation is influenced by technological progress, which determines increased production with a given quantity of resources.

The dotted lines represent the new values of units of produced goods and the new production possibility curve. The number of units of produced services has remained unchanged.

2. a) the most important ingredients used in producing bread are flour, produced from processed wheat, and butter or margarine. If the price of wheat increases, this will lead to increased production costs, which will also determine the price of bread to increase. Bread is a good for which no substitute exists. Of course, there are other goods with similar qualities, like nutritive value or protein composition, for example rice, pasta and potatoes, but the competition between these goods can be considered indirect. For example, one cannot eat gem and butter with pasta or potatoes, but only with bread. For such goods, the demand is relatively inelastic. In other words, if the price of bread increases, the demand will remain generally constant, and people who usually eat bread will continue to buy it, no matter how high levels the price reaches. The diagram below illustrates this situation:

Bread demand diagram

In such conditions of wheat price increasing, the supply will also remain quite constant, as revealed below:

Bread supply diagram b) as mentioned above, butter and margarine represent important ingredients for producing bread, but not as important as wheat. Therefore, an increase in price of butter or margarine would have even less important effects on the demand and supply of bread, for the reasons described above. Therefore, the demand and supply diagrams will illustrate the following: