Economic Principles and Decision Making Assignment - ECON6000

This assignment solution addresses two economic problems. Problem A explores the production possibilities frontier (PPF) in District D, analyzing the production of Schmeckt Gut energy bars and Schmeckt Gut 2.0, including the impact of increased demand and strategies to meet it. It covers the assumptions underlying the PPF, its characteristics (downward slope and concavity), and the concept of opportunity cost. Problem B focuses on determining the equilibrium price and quantity in the local market of Industria, using demand and supply functions for energy bars. It calculates the equilibrium point and examines the effects of a price increase on demand and supply, demonstrating the application of the laws of demand and supply. The solution includes graphical representations and detailed explanations of economic concepts.

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

1ECONOMIC PRINCIPLES AND DECISION MAKING
Table of Contents
Answer to problem A.................................................................................................................2
1.Production Possibilities Frontier in District D....................................................................2
2. Production Possibilities Frontier........................................................................................2
3. Increasing production along the PPF.................................................................................3
Answer to problem B.................................................................................................................4
1.Determination of equilibrium price and quantity................................................................4
2. Effect of price increase on demand and supply.................................................................5
References..................................................................................................................................7

2ECONOMIC PRINCIPLES AND DECISION MAKING
Answer to problem A
1.Production Possibilities Frontier in District D
0 1000 2000 3000 4000 5000 6000
0
5000
10000
15000
20000
25000
30000
35000
Producti on Possibility Fronti er
Schmeckt Gut 2.0
Schmeckt Gut Energy Bar
Figure 1: Production Possibilities Frontier for production of Schmeckt Gut energy bar
and Schmeckt Gut 2.0
2. Production Possibilities Frontier
The main problem of economics is unlimited want of people and limited resources to
fulfill the wants. With the limited resources every economy tries to produce maximum
output. Production Possibility Frontier defines a framework that shows feasible combination
of maximum output of two products or services that an economy attempts to produce by fully
utilizing the accessible resources (Goodwin et al., 2015). Given the fact that resources are
available only to a limited extent, any attempt to increase production of one good requires
sacrifice of output of other good creating a trade-off for choices. This trade-off for choices
further develops the concept of opportunity cost which is crucial for discussing PPF.

3ECONOMIC PRINCIPLES AND DECISION MAKING
There are some primary assumptions based on which PPF constructed. These are discussed
below.
Two goods: The simplest assumption of PPF is that the economy engages in producing only
two goods. Considering production of only two goods helps to limit the analysis in a two-
dimension framework which is simple to construct and easy to understand.
Fixed resources: The next vital assumption of PPF is that the economy can access fixed and
limited quantities of resources (Bade & Parkin, 2018). The assumption of limited resources
helps to address the issue scarcity problem. It actually explains consequences of change in
resource on economic growth.
Fixed technology: PPF assumes that level of technology in an economy is fixed. Implication
of the assumption is same as that of the fixed resource assumption.
Technical efficiency: The fourth vital assumption in discussion PPF is that the economic
resources are put in the production in most efficient manner (Nguyen & Wait, 2015). When
resources are used in technically efficient way, maximum output are produced.
The production possibilities frontier has two main characteristics
Downward sloping (from left to right): Because of limited resources an economy has to
sacrifice some quantity of one good in order to produce additional unit of others. The
downward slope of PPF indicates as production of one good increases that of the other
decreases.
Concave to origin: PPF is concave because of the increasing opportunity cost meaning more
and more increase in one good needs more and more forgone units of the other good.
3. Increasing production along the PPF

4ECONOMIC PRINCIPLES AND DECISION MAKING
In District D, the respective demand for Schmeckt Gut 2.0 and Schmeckt Gut Energy
Bars are 3,000 and 18,000 respectively. The schedule of production capacity indicates that
this is an attainable output combination. Sudden increase in demand for Schmeckt Gut 2.0 to
4,000 and that of demand for Schmeckt Gut energy bar to 20,000 results in some unattainable
output combination given the available resources. In order to meet and new and increased
demand, District D should adapt some alternative strategies associated with higher output of
two products. Firstly, District D can look for exploring new resources. An increase in
resource base increases resources employment in both industries resulting in a higher output.
Innovation of new technology is another possible way to attain a higher output and meet the
demand of higher output (Kreps, 2019). Alternatively, in order to make the new demand
feasible District D can go for specialization of resources. Employing resources in line with
specialization is an effective way of producing additional output of one good without
sacrificing output of other.
Answer to problem B
1.Determination of equilibrium price and quantity
In the local market of Industria, given demand function for energy bar is
The given supply function of the same is
Free market determines equilibrium by equality supply and demand (Kolmar, 2017).
Therefore, the equilibrium price and quantity of energy bar in the local market can be
obtained as

5ECONOMIC PRINCIPLES AND DECISION MAKING
Demand=Supply
Corresponding to the equilibrium quantity equilibrium price in the market is
Market equilibrium price = $400
Market equilibrium quantity = 200
2. Effect of price increase on demand and supply
A price increase by $1, increases equilibrium price to ($400 + 1) = $401.
At price = $401. The demand is

6ECONOMIC PRINCIPLES AND DECISION MAKING
At price = $401. The supply is
The obtained changes in demand and supply can be explained by the concept of law
of demand and law of supply. Law of demand indicates an inverse association between price
and demand, given all other factors remain constant. The increase in price of energy bar from
$400 to $401 reduces demand from 200 to 199.5, thus satisfying the proposition of law of
demand.
Law of supply suggests a direct association between price and supplied quantity
(Sexton, 2015). As price of energy bar increases from $400 to $401, quantity of energy bar
supplied increases from 200 to 201. The resulted change in supply following the change in
price thus satisfies law of supply.

7ECONOMIC PRINCIPLES AND DECISION MAKING
References
Bade, R., & Parkin, M. (2018). Foundations of Microeconomics, Global Edition. Pearson
Education Limited.
Goodwin, N., Harris, J. M., Nelson, J. A., Roach, B., & Torras, M. (2015). Principles of
economics in context. Routledge.
Kolmar, M. (2017). Principles of Microeconomics. Springer International Publishing.
Kreps, D. M. (2019). Microeconomics for managers. Princeton University Press.
Nguyen, B., & Wait, A. (2015). Essentials of Microeconomics. Routledge.
Sexton, R. L. (2015). Exploring microeconomics. Nelson Education.