Economic Principles & Decision Making - Assessment 2

This article discusses the production possibility frontier and the equilibrium price and quantity of energy bars in Industria. It also suggests measures to meet the increased demand and discusses their sustainability.

ECONOMIC PRINCIPLES & DECISION MAKING
ASSESSMENT 2
STUDENT ID:
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PROBLEM A
1) Using the given data, PPF has been drawn with the use of Excel and illustrated below.
0 5000 10000 15000 20000 25000 30000 35000
0
1000
2000
3000
4000
5000
6000
Production Possibility Frontier
Schmeckt Gut Energy Bar
Scmeckt Gut 2.0
2) PPF represents the various output possibilities with regards to the given two goods i.e.
Schmeckt Gut Energy Bar and Schmeckt Gut 2.0 with regards to using the available
resources at maximum efficiency of 100%. Using the given resources available, the
production cannot exceed to any point besides the boundary of the PPF curve which has been
indicated. As a result, a production of more than 30000 units of Schmeckt Gut Energy Bar is
not possible without a change in the factors of production (Dombusch, Fischer & Startz,
2016).
3) In the given case, there has been an increase in the demand of the products owing to which
it has exceeded beyond the PPF boundaries (Koutsoyiannis, 2015). This is apparent from the
fact that the total demand is 4000 Schmeckt Gut 2.0 along with 20000 units of Schmeckt Gut
Energy Bar. However, under the given PPF, it is apparent that with a production level of
4000 Schmeckt Gut 2.0, maximum production level of 10000 units of Schmeckt Gut Energy
Bar. Clearly, there would be a shortfall in this case. As a result, suitable measures need to be
taken for meeting the increased demand and these measures are stated below (Dombusch,
Fischer & Startz, 2016).
a) 1) One possibility to meet this increase demand is to improve the technology of production
which can be potentially done through the use of automatic machines which would free up
labour and also result in higher production levels.

2) Another possibility is to increase the resources devoted to the production of the above two
products which could be potentially in the form of capital, land, labour. In case any capital or
labour may not be available internally, the same can be brought from outside also in order to
meet the increase demand.
3) For meeting the increase demand in the short term, importing from outsider could be an
option especially in the short run. This is based on the assumption that surplus is available in
the neighbouring region and hence the same can be supplied at a short notice.
b) The sustainability of the three proposals is discussed as indicated below.
1) The shift in technology is a sustainable means as once done, this shift could be permanent
and thus tend to shift the PPF in the outward direction which would indicate enhanced
production capabilities and continuous higher level of production.
2) The use of additional resources especially if provided internally would also be sustainable
to the extent that the incremental resources are not withdrawn. These would also lead to
outward shift in the PPF which would indicate enhanced production capabilities for the
combination of the given two products.
3) The importing based measure may not be sustainable since there is dependence on the
other country. It is essentially a short term measure aimed to meet the increased demand from
District D with the anticipation of working out sustainable measures if the increased
consumption is expected to stay (Koutsoyiannis, 2015).
PROBLEM B
1) In order to estimate the equilibrium price and quantity, it is imperative to equate the
demand and supply which is carried out below.
At the equilibrium price, QD=QS = Q, hence
800-2Q = 200 + Q
Solving the above, we get Q = 200
Hence, the equilibrium quantity of the energy bars local market in Industria is 200 units.

Demand equation is P = 800 - 2Q
Putting Q = 200, we get P = $ 400
Hence, the equilibrium price of the energy bars local market in Industria is $ 400.
2) It is apparent that from the demand equation that the slope is negative which is in line with
the law of demand. As per the law of demand, price and demand tend to be inversely
proportional. This implies that if price is increased, there would be a decrease in demand.
Similarly, when there is a decrease in the price, then quantity demanded would increase. In
the given case, since the price of energy bar is increased by $ 1, hence the corresponding
demand would be lowered in accordance with the demand equation where instead of P, (P+1)
would be used (Besanko & Braeutigam, 2014).
Also, it is apparent that the supply equation has a positive slope owing to law of supply. As
per this, piece and demand tend to be directly proportional. This implies that if the price is
increased, there would be an increase in supply. Similarly, when there is a decrease in the
prices, then quantity supplied would also decrease. In the given case, since the price of
energy bar is increased by $ 1, hence the corresponding supply would be increased in
accordance with the supply equation where instead of P, (P+1) would be used (Pindyck &
Rubinfeld, 2014).

References
Besanko, D. & Braeutigam, R. (2014) Microeconomics, New York: John Wiley & Sons.
Dombusch, R, Fischer, S & Startz, R (2016).Macroeconomics (10th ed) New York: McGraw
Hill Publications
Koutsoyiannis, A. (2015). Modern Macroeconomics (4th ed), London: Palgrave McMillan
Pindyck, R. & Rubinfeld, D. (2014) Microeconomics, London: Prentice-Hall Publications