Introduction To Microeconomics

Runnning head: INTRODUCTION TO MICROECONOMICS
Introduction To Microeconomics
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1INTRODUCTION TO MICROECONOMICS
Table of Contents
Question 1..................................................................................................................................2
Question a...............................................................................................................................2
Question b..............................................................................................................................2
Question c...............................................................................................................................4
Question 2..................................................................................................................................5
Question a...............................................................................................................................5
Question b..............................................................................................................................5
Question c...............................................................................................................................5
Question d..............................................................................................................................6
Question e...............................................................................................................................7
Question f...............................................................................................................................9
Question 3..................................................................................................................................9
Question a...............................................................................................................................9
Question b............................................................................................................................10
Question c.............................................................................................................................11
References................................................................................................................................13

2INTRODUCTION TO MICROECONOMICS
Question 1
Question a
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Production Possibility Frontier
Cars
Bicycle
Figure 1: Production Possibility Frontier
Question b
Production Possibility Frontier
The curve or frontier showing different combinations of two goods or services that an
economy can produce using all of its resources in the most efficient manner and a given
technology of production is called production possibility curve. Alternatively, it is also
known termed as production possibility frontier (Baumol and Blinder 2015). The key
assumptions and properties of PPF are discussed below.
Assumptions of PPF
Two goods: The simplest assumption of PPF analysis is that economy can produce only two
goods or services. Following this assumption, PPF can be drawn in a two dimensional
framework.

3INTRODUCTION TO MICROECONOMICS
Fixed resources: The next important assumption of PPF is that resources are fixed and hence,
available in limited quantities to the economy. This assumption addresses the economic
problem of scarcity and therefore is important for analysis (Sloman and Jones 2017). The
assumption of fixed and limited resources helps to understand effect of any possible change
especially its effect on economic growth.
Fixed technology: Another assumption based on which PPF is drawn is that the economy
has fixed technology. Technology refers to the knowledge of the society regarding production
of the goods or services. The assumption is as useful as the assumption of fixed resources. At
a given time, economy possesses a certain level of technology. Therefore, it is reasonable to
make such assumption.
Technical efficiency: The fourth and final assumption is that in the economy, resources are
used in a technically efficient way. Technical efficiency implies that in the production
process there is no waste of resources in the production process and therefore, maximum
output is obtained with the fixed resources.
Properties of PPF
Concave to the origin: Production possibility frontier is of concave shape. The reason behind
concave shape of PPF is the nature of increasing opportunity cost. All the resources in the
economy are not perfect substitutes for each other (McKenzie and Lee 2016). As resources
are moved from one industry to another inefficiency increases resulting in a higher
opportunity cost.
Increasing marginal rate of Transformation: The slope of PPF curve shows the marginal
rate of transformation. In order to produce every additional unit of one good, the economy
needs to sacrifice more and more units of the other good. This is to say, with moving from
right to left along the PPF, marginal rate of transformation or slope of PPF increases.