Demand for Chips is Inelastic


Added on  2019-11-12

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A 1a.The production possibility frontier between cars and bicycles (PPF) is shown below with cars on the Y axis and bicycles on X axis. It isa bow shaped curve , which is concave to the origin. b.A curve above shows the possible combinations of both goods that can be produced in Newland.This graph assumes the following:Inputs used to produce cars and bicycles are unchanged when we draw this curve. The quantity of inputs as well as their productivity is fixed. The technology to produce cars and bicycles is assumed unchanged or static. This meansthat the same technology produces 1000 or 2000 bicycles. Technology does not change with changes in output levels shown on a PPF. According to the table given , Newland can produce a range of combinations of goods- 30000 cars and zero bicycles OR 5000 bicycles and zero cars are two extreme combinations. PROPERTIES OF PPF:
Demand for Chips is Inelastic_1

SHAPE: A typical PPC is concave to the origin, and accordingly shaped like a bow when seem from the origin. This shape is attributed to increasing opportunity costs of producing any good- car or bicycle. Opportunity cost of a good X refers to the amount of good Y (alternative good) that must be given up to get 1 more unit of X . So to get 1000 more bicycles (1000 to 2000 ) we give up 4000 cars( =28000-24000). So 4000 cars in opportunity cost of 1000 bicycles. As we increase bicycles we must give up more cars for the same additional 1000 bicycles. As we go from 4000 to 5000 bicycles we have to give up on 10000 cars ( =10000-0). The opportunity cost of same 1000 bicycles is now higher. This illustrates increasing opportunity costs concept.This happens due to the fact that resources are fully used and all resources are not equally efficient/productive at producing both cars and bicycles. EFFICIENCY ON PPC: Any point that lies inside the curve reflects on unused resources. This is inefficient as idle resources do not ad any value to society.Any point that lies outside/beyond the curve is unachievable, though it may be desirable. Such apoint is reached by expansion in resources, or technical improvements that raise productivity levels of existing resources or trade. Any point on the curve is considered EFFCICIENT, as all resources are used. c.We are at the point where 3000 bicycles and 18000 cars are made. We need to get 1000 more bicycles and 2000 more cars. As shown this objective is achieved at A, which does not lie on the PPC. Hence it is not possible to increase both cars and bicycles with existing resources. As per data we can only make 10000 cars if we want 4000 bicycles. The only way to do so is to shift out the PC by:1.A rise in input levels. 2.An improvement /productivity increase of inputs due to better technology.3.International trade can shift out PPC.
Demand for Chips is Inelastic_2

A 2:Revenue is the product of price and quantity of demanda.At a price of $400 the quantity of demand is 30 millions. Revenue = 30*400 = 12000 million or 12 billion.At a price of $350 the quantity of demand is 35 million. Revenue = 35*350 = 12250 million or 12.25 billion. So revenue has increased. b.Theory tells us that change in price and changes in revenues are related through the price elasticity of demand . When demand is inelastic, then changes in price and revenues follow same path. Any rise in price leads to higher revenues, while lower prices lower revenues.When demand is elastic then changes in price and revenues take opposite paths. As price rise revenues will fall and vice versa. We calculate revenues to see if demand for chips is elastic or inelastic. When price is 300 the revenues = 300*40= 12000 million or 12 billionWhen price rises to 350 the revenues become 12.25 billion. Thus, a rise in price is accompanied by a rise in revenues- demand is inelastic. Looking a price fall, when price falls to 250 then revenues = 250*45 = 11250 million or 11.25 billion. Price fall causes revenues to fall. So whether price falls or rises we have shown that demand is inelastic.PART II
Demand for Chips is Inelastic_3

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