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Principles of Microeconomics - Essay Example

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Question 1: the concept of production possibility curve involves opportunity cost which means that if a firm is producing consumption goods as well as capital goods, every additional unit produced of capital goods will eventually result in equal proportion of consumption goods forgone…
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Download file to see previous pages This will create imbalance in the economy hence may result in a shortage of consumer goods. Question 2: opportunity cost means the best substitute given up in order to produce more of other type of goods. As more of one good is produced the opportunity cost to produce it rises (Sloman). Each time we make a choice to do something; simultaneously we are eliminating the choice of an alternative good. Moreover, if a country is producing more of one good it has to sacrifice ever increasing amount of the other. The reason for it is difference in factor of production. Production factors may suit production of a particular type of good and shifting resources to production of other type of good would result in increasing opportunity cost. For example: if government decides to build a shopping mall instead of hospital, the facilities and health care provided by that hospital is given up or forgone. Question 3: Change is quantity demanded: a change in quantity demanded occurs when there is movement along the demand curve with respect to price and quantity. It usually stems from a change in the price of the product. An increase in the price causes downward movement along the demand curve leading to an increase in the quantity demanded whereas a decrease in the price causes an upward movement along the curve causing a decrease in the quantity demanded. ...
It is important to note that this causes a total change in the range of price and quantity combinations. Price D1 D2 Quantity Question 4: An economic equilibrium is located when demand and supply of the commodity in discussion meets (Sloman). This point is said to be the optimum level of functioning point in an economy because all the stakeholders are able to achieve their objective of buying and selling their goods at their desired quantity level. However, economist work hard to reach this point since such an equilibrium is theoretical. Equilibrium would only be achieved at a point where demand and supply curves intersect. Moreover, any point below or above the equilibrium will either create excess demand in case of low price, or excess supply in case of higher price. The gap in supply and demand will exist in the short term. However, as sellers and consumers readjust their sell and purchase habit, equilibrium will be reached eventually. Question 5: If the technology to produce pagers improves it will push the supply curve to the right and there will be an increase in supply of pagers, meaning that for every price, the quantity supplied will increase. If the prices of cellular phones drop, the aggregate demand for pagers will decrease because cell phones are an alternative product, pushing the aggregate demand curve to the left, meaning that for every price, the quantity demanded will decrease. Both these factors shall bring down the price of pagers down by a significant level and make pagers much cheaper. Certain products have a very limited supply and an excessive demand, such as the superbowl tickets. The price elasticity of such products is extremely low as people are willing to pay more than the ...Download file to see next pagesRead More
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