Economic Principle and Decision Making

This document explains the concept of Production Possibility Frontier and its assumptions. It also discusses the ways to increase production of two goods simultaneously. Additionally, it explains the concept of market equilibrium and laws of demand and supply with the help of an example.

Running head: ECONOMIC PRINCIIPLE AND DECISION MAKING
Economic Princiiple and Decision Making
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1ECONOMIC PRINCIIPLE AND DECISION MAKING
Problem A
Answer to question 1
Figure 1: Production Possibility Frontier
Answer 2
Production Possibility Frontier (PPF)
The Production Possibility Frontier refers to a frontier that represents highest possible
output for two goods that can be produced with the available resources. While constructing
PPF it is assumed the economy is making efficient use of all the available resources. Factors
of production such as capital, labor and production technology dictate the position of PPF. It
is also termed as production possibility curve (PPC). The PPF shows possible combination of
two goods using fixed resources (Tietenberg & Lewis, 2016) Increase in production of one
good thus involves a decrease in production of other. The unit of one good given up to
increase production of other is called the opportunity cost of production. The increasing
opportunity cost makes PPF concave shaped. Important assumptions of PPF include constant
technology, efficient use of resources and the economy produces only two goods.

2ECONOMIC PRINCIIPLE AND DECISION MAKING
Answer 3
In district D, there is usually demand of 3000 Schmeckt Gut 2.0 and 18,000 Schmeckt
Gut Energy Bars. Suddenly, the demand increased to 4000 Schmeckt Gut 2.0 and 20000
Schmeckt Gut Energy Bars. Following the standard norms of PPF, increases in production of
one good needs a decline in production of the other good. As demand for both Schmeckt Gut
2.0 and Schmeckt Gut Energy Bars increases simultaneously, the concerned PPF should shift
outward. The increased demand can be achieved in any of following ways. Firstly, production
of both goods can be increased by using new and innovative production technology. Use of
advanced technology increases output per unit of input and hence, more output can be
produced with the given input (Baumol & Blinder, 2015). Secondly, District D should focus
on exploring new resources. With increase in resource availability more resources can be
devoted to both industries resulting in a higher output. Thirdly, both the industry can adapt
the technique of specialization of resources to produce a larger output.
Problem B
Answer 1
Given the demand energy bars:
Given the supply of energy bars:
Equilibrium is attained where demand in the market equals that of the supply
Demand=Supply

3ECONOMIC PRINCIIPLE AND DECISION MAKING
Using the equilibrium quantity, the market price can be obtained as
The market equilibrium price is obtained as $400 and market equilibrium quantity is
obtained as 200.
Answer 2
If price increases by $1, then new price will be ($400 + $1) = $401
At the new price, demand will be

4ECONOMIC PRINCIIPLE AND DECISION MAKING
At the new price, supply will be
Law of demand suggests an inverse association between quantity demanded of a good
and its price. As the price of energy bar increases by $1, demand for energy bar reduces from
200 to 199.5. The results thus support the proposition of law of demand.
Law of supply states a positive association between quantity supplied of a good and
its price (Cowen & Tabarrok, 2015) As price increases to $401, supply of energy bar
upsurges from 200 to 201. This shows quantity supplied of energy bar rises in line with price
of energy bars. The result therefore supports the statement of law of supply

5ECONOMIC PRINCIIPLE AND DECISION MAKING
References
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Nelson
Education.
Cowen, T., & Tabarrok, A. (2015). Modern principles of microeconomics. Macmillan
International Higher Education.
Tietenberg, T. H., & Lewis, L. (2016). Environmental and natural resource economics.
Routledge.