BUS102 - Introduction to Microeconomics


Added on  2019-10-31

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A 1a.The production possibility frontier between cars and bicycles (PPF) is drawn on the baisis of the capacity of Newland. We represent cars on the Y axis and bicycles on X axis. The sahpe of the curve is no linear, with a bow towards the origin, making it concave to the origin. b.A production possibility frontier is defined as’ the locus of points that show all combinations of two goods that an economy can produce’. The implicit assumptions for this definition are explained below. One. The concept assumes only two goods are produced in the economy. This is very simplistic but adequate to understand the concept involved and explained through the other assumptions. The second assumption is that resources/ inputs are fixed and limited. To produce more of one good we have to reduce the other good. This gives downward slope to production possibility frontier. Lastly the technology used to produce the two goods is unchanged when the curve is drawn. Any change will lead toa new production possibility frontier based on new productivity levels of resources. A new technology can shiftthe production possibility frontier outwards, increasing the quantity of goods produceable. PROPERTIES OF PPF:Based on the assumption we have some properties of the production possibility frontier described in terms of its shape and description .

DESCRIPTION OF ON PPC: we can understand the PPF through various points in the graph. Any point that lies inside the curve implies unemployment of resources. Unused resources are of no value and cause inefficiency, as idle resources do not contribute to economic value.Any point that lies outside the curve is unattainable, while may be desirable. By the very mathematical construction of the curve, such a point needs more resources, which are currentlyunavailable. Any point on the curve is EFFCICIENT, as all resources are used. To move between any two points implies a reallocation of resources, while their full employment is intact. SHAPE: A production possibility frontier is bow shaped, due to the concept of opportunity costs that are rising as we increase cars production. Opportunity cost of a car refers to the amount of bicycles (alternative good) that must be given up to get 1 more bicycle produced. Cars have to be given up as we have limited resources, with full employment of them. There is no other option to increase bicycles without reducing cars. Increasing opportunity costs means that the amount of cars we need to give up increases as bicycles rise. Assume we go from 1000 to 2000 bicycles, which requires a reduction of 4000 cars (=28000-24000). So opportunity cost of 1000 bicycles is 4000 cars. Now let us go from 3000 to 4000 bicycles. This requires reduction of 8000 cars ( 18000-10000). There has been a rise in cars that need to given up to gain the equal amount s of 1000 bicycles. This demonstrates increasing opportunity costs concept. The cause is fully used resources which are not equally efficient/productive at producing both cars and bicycles. c.We start with production of 3000 bicycles and 18000 cars. We need to get 1000 more bicycles and 2000 more cars. This means we need to increase both goods, which is impossible to do with current resources and technology. This is because 3000 bicycles and 18000 cars we are already on the PPF. As resources are limited we can’t increase both goods. To do so needs more resources. We can reach A ( 4000 bicycles and 20000 cars), which does not lie on the PPC by either one or a combination of the following, which will shift out the PPF to reach A:Increase in resourcesNew and better technology

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