Economic Principles And Decision Making

This study material covers economic principles and decision making. It includes topics such as the production possibility frontier, demand and supply functions, and strategies for increasing output.

Running head: ECONOMIC PRINCIPLES AND DECISION MAKING
Economic Principles And Decision Making
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1ECONOMIC PRINCIPLES AND DECISION MAKING
Table of Contents
Part A.........................................................................................................................................2
Question 1..............................................................................................................................2
Question 2..............................................................................................................................2
Question 3..............................................................................................................................3
Part B..........................................................................................................................................3
Question 1..............................................................................................................................4
Question 2..............................................................................................................................5
Reference list..............................................................................................................................7

2ECONOMIC PRINCIPLES AND DECISION MAKING
Part A
Question 1
Figure 1: Production Possibilities Frontier
Question 2
Production Possibility Frontier
The production possibility frontier is an indicative measure for different combination
of maximum possible output for two goods or services that can be attained by full utilization
of available resources. Production of one good or service creates a trade-off over production
of other (Fare, Grosskopf & Lovell, 2013). This is to say, more production of one good needs
less production of others. The primary assumptions and characteristics of PPF are discussed
below
Assumption
The four primary assumptions of PPF are
i.The economy produces only two goods
ii. The resources are fixed in the economy

3ECONOMIC PRINCIPLES AND DECISION MAKING
iii. The technology of production is fixed
iv. The economy uses resources in a technologically efficient manner
Characteristics
The two basic characteristics of PPF are as follows
i.PPF is downward sloping
ii. PPF shapes concave to the origin
Question 3
The initial demand for Schmeckt Gut 2.0 and Schmeckt Gut Energy bars are 3,000
and 18,000 respectively. Given the production possibility schedule, it is a feasible
combination of output in the District D. Suddenly is has been observed that demand for
Schmeckt Gut 2.0 increases to 4000 and that of the demand for Schmeckt Gut Energy bars
increases to 20,000. Given fixed amount of resources it is not possible to simultaneously
increase production of both goods. District D therefore should go for alternative strategies to
attain a higher combination of two goods.
One possible way to attain such an output combination is to adapt an advanced
technology of production. Adaption of an advanced production technology increase output
per unit of input without altering the input combination. Alternatively, District D can go for
exploring new stock of resources. If more resources are allocated to both the industries will
experience a simultaneous increase in output (Myers, 2016). A third possible way to increase
productivity and meet the increases demand is to use resources in line with specialization.
Specialization of resources helps to increase output without sacrificing output of any other
industries.
Part B

4ECONOMIC PRINCIPLES AND DECISION MAKING
Question 1
The demand function for energy bar is
Corresponding supply function is
In the market, equilibrium is obtained by equating demand and supply
Demand=Supply
Putting equilibrium quantity in the supply function equilibrium price can be computed as

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Equilibrium price in the market is $400 and equilibrium quantity in the market is 200.
Question 2
The subsequent price increase by $1, makes market price
$ 400+ $ 1=$ 401
At the higher price estimated demand is
At the new higher price, the estimated supply will be
The law of demand states that, given all other factor an increase in price of a good
reduces quantity demanded of the good and vice-versa (Cowell, 2018). At a price of $400,
demand for energy bar was 200. A price hike of $1 reduces energy bar demand to 199.5. The
higher price discourages consumers to consume energy bars and encourages them to look for
cheaper alternative. This reduces the energy bar demand which is in line with law of demand.

6ECONOMIC PRINCIPLES AND DECISION MAKING
The law of supply suggests that given all other factor an increase in price of
commodity raise quantity supplied of the concerned commodity and vice versa (Nicholson &
Snyder, 2014) Increase in price of a good increases profitability of suppliers and hence,
encourages them to supply them. The $1increase in energy bar price raises supply to 201
from earlier supply of 200 at price $400. From the supply function it is thus obtained that
increase in price increases supply as suggested by law of supply.

7ECONOMIC PRINCIPLES AND DECISION MAKING
Reference list
Cowell, F. (2018). Microeconomics: principles and analysis. Oxford University Press.
Fare, R., Grosskopf, S., & Lovell, C. K. (2013). The measurement of efficiency of
production (Vol. 6). Springer Science & Business Media.
Myers, D. (2016). Construction economics: A new approach. Routledge.
Nicholson, W., & Snyder, C. (2014). Intermediate microeconomics and its application.
Nelson Education.