Economic Principles and Decision Making

This assignment explores economic principles through two case studies. The first examines the Production Possibility Frontier (PPF) for Schmeckt Gut Energy Bars and Schmeckt Gut 2.0, discussing efficiency, opportunity cost, and solutions to increased demand. The second analyzes market equilibrium in the energy bar industry, illustrating the impact of price changes on supply and demand according to the law of supply and demand.

Running head: ECONOMIC PRINCIPLES AND DECISION MAKING
Economic Principles and Decision Making
Name of the Student
Name of the University
Author note

1ECONOMIC PRINCIPLES AND DECISION MAKING
Table of Contents
Problem A..................................................................................................................................2
Problem B...................................................................................................................................4
References..................................................................................................................................6

2ECONOMIC PRINCIPLES AND DECISION MAKING
Problem A
1. Production Possibility Frontier for the production of the Schmeckt Gut Energy Bar
and Schmeckt Gut 2.0.
Figure 1: Production Possibility Frontier
2. Production Possibility Frontier of an economy symbolizes for different possible
combination two goods produced within the economy while making use of all of the
available resources (Friedman, 2017) . Any point on the PPF implies efficient
production point. The PPF is drawn based on some basic assumptions. On important
assumption is increasing opportunity cost of production. In order to increase
production of one good resources must be move out from the other industry which is
costly. The two extreme points on the PPF shows the maximum amount of each of the
good that can be produced in the economy (Yang & Ng, 2015) . From the above PPF,
it can be said that the economy can have a maximum 30,000 Schmeckt Energy bar
while the maximum number of Schmeckt Gut 2.0 is 5000.
a) Currently district D is producing 3000 Schmeckt Gut 2.0 and 18,000 Schmeckt Gut
Energy bars. This is a point on the PPF. This means District D is operating on an

3ECONOMIC PRINCIPLES AND DECISION MAKING
efficient scale. Now, demand has increased to 4,000 Schmeckt Gut 2.0 and 20,000
Schmeckt Gut Energy Bars. This means demand for the goods has increased. Given,
the assumption of PPF that to increase the production of one good the production of
other good must be increased this is not possible to attain by the current range of PPF.
It is possible only when PPF shifts outward. PPC shifts outward only when output
capacity increases (Nicholson & Snyder, 2014). When there is an advancement of
existing technology then output for both the product increases. Another possibility is
finding a new resource base. Allowing specialization within the industry or hiring
more labours can also increases output and can help District D to achieve its increased
demand.
b) Among the solution given above, finding a new source of resources and exploiting it
is not sustainable. Hiring more labours also has limitations because of diminishing
marginal returns. Advancement of technology and using existing resources efficiently
is can sustainable way to increase productivity and increasing output.

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Problem B
1.
Demand for energy bar, P=800−2 QD
Supply of Energy bar, P=200+ 1QS
At equilibrium, Demand = Supply
800−2QD =200+1QS
¿ , 2Q+1 Q=800−200
¿ , 3 Q=600
¿ , Q=200
P=800−2 Q
¿ 800− ( 2∗200 )
¿ 800−400=4 00
Market equilibrium price is 400 and equilibrium quantity is 200.
2.The law of demand suggests an inverse relation between price and demand when other
factors remain constant. The law of supply on the other hand implies a positive relation
between price and quantity supplied given all other factors (Rios, McConnell & Brue, 2013).
Therefore, when price increases by $1 then according to law of demand people will demand
less energy bars. Suppliers on the other hand, supplies on the other hand increases their
quantity supplied. This will create an excess supply condition in the market for energy bars.

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Figure 2: Market condition when price rises
(Source: as created by Author)

6ECONOMIC PRINCIPLES AND DECISION MAKING
References
Friedman, L. S. (2017). The microeconomics of public policy analysis. Princeton University
Press.
Nicholson, W., & Snyder, C. M. (2014). Intermediate microeconomics and its application.
Cengage Learning.
Rios, M. C., McConnell, C. R., & Brue, S. L. (2013). Economics: Principles, problems, and
policies. McGraw-Hill.
Yang, X., & Ng, Y. K. (2015). Specialization and economic organization: A new classical
microeconomic framework (Vol. 215). Elsevier.