Economic Principles & Decision Making

This study material discusses economic principles and decision making. It covers topics such as the production possibilities frontier, meeting increased demand, and equilibrium conditions. It provides solutions for fulfilling the increased demand and analyzes the sustainability of different proposals. Additionally, it explains the concept of equilibrium price and quantity.

ECONOMIC PRINCIPLES & DECISION MAKING
ASSESSMENT 2
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ECONOMICS
PROBLEM A
1) The Production Possibilities Frontier or PPF has been drawn using the given data provided
which highlights the various combinations of output possible.
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) The PPF tends to highlight the various combinations in regards to output of the given two
products which are possible under the assumption that the available resources are being
optimally utilised. Therefore, it is not possible without additional resources or changes in
factors of production to have a combination of output which lies outside the curve. Any point
which lies inside the curve hints at inefficient utilisation of resources. The points lying on the
curve represent combinations with maximum efficiency or productivity (Mankiw,2016).
3) Based on the increased demand of district D, it is evident that the current supply would not
be sufficient to meet the demand. This is evident from the PPF where with an Schmeckt Gut
2.0 production of 2000, thee corresponding production of Schmeckt Gut Energy Bar cannot
exceed 10,000. However, the given data indicates that the increased demand of energy bar
would be 20,000 units. Owing to this shortage, there is a need for additional measures to
ensure that this demand is fulfilled (Dombusch, Fischer & Startz, 2016).Three possibilities in
this regard are mentioned below.
a) 1) There can be an improvement in the production technology through automation which
could result in production being increased.
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ECONOMICS
2) If the efficiency related to production processes does not improve, then alternatively
greater resource allocation would have to be done in terms of labour, capital so as to enhance
the production for fulfilling increased demand.
3) If the neighbours have surplus of the products that are needed, then the same can be
imported in the short term while putting in place measures for increased production
domestically.
b) For the given proposals, the sustainability has been critically analysed below
(Koutsoyiannis, 2015).
1) Improving the production technology offers a sustainable solution to the current problem
as the higher production can be continued in the future also. However, upgrading the
production technology would require time and capital.
2) Deployment of higher resources into production of the given products may be sustainable
based on the resource source. It is imperative to note that the incremental sources may be
sourced domestically or from outside the country. In the latter case, the foreign debt would
need to be paid in a short period and hence sustainability would not arise.
3) In the short term, importing seems to be most suitable solution if feasible. However, in the
long run, it would jeopardize the security of the nation as for fulfilling demand, there is
significant foreign dependence. This would not be considered a favourable position.
PROBLEM B
1) In order to determine the equilibrium condition i.e. equilibrium price and equilibrium
quantity, it is essential to equate the demand and supply functions which have been provided.
Also, the equilibrium quantity can be highlighted by the symbol Q.
Hence, 800-2Q = 200 + 1Q
By solving the above, we get Q = 200
In order to obtain the equilibrium price, the above value of equilibrium quantity has been
substituted in the demand equation as highlighted below.
P = 800 – 2*200 = $ 400
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From the above, it is apparent that the equilibrium price is $ 400 per unit while the
corresponding equilibrium quantity is 200 units.
2) The slope of the demand equation is negative which implies that price and quantity tend to
move in opposite direction. As a result, if the price is increased by a dollar, there would be a
fall in the demand. However, the exact impact of this can be found from the demand equation
where instead of P, one can substitute (P+1) which would yield the revised equation (Pindyck
& Rubinfeld, 2015).
Unlike demand equation, there is a positive slope for the supply equation which makes
rationale sense as at higher price more suppliers would be willing to sell their goods. As a
result, increase in price by a dollar would result in increased energy bar supply. However, the
exact impact of this can be found from the supply equation where instead of P, one can
substitute (P+1) which would yield the revised equation (Besanko & Braeutigam, 2016).
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References
Besanko, D. & Braeutigam, R. (2016) Microeconomics (4th ed.), New York: John Wiley &
Sons.
Dombusch, R, Fischer, S & Startz, R (2016) Macroeconomics (10thed) New York: McGraw
Hill Publications
Koutsoyiannis, A. (2015). Modern Macroeconomics (4th ed), London: Palgrave McMillan
Mankiw, G. (2016). Principles of Macroeconomics (6th ed.). London: Cengage Learning.
Pindyck, R. & Rubinfeld, D. (2015) Microeconomics (7th ed.), London: Prentice-Hall
Publications
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