PPF CURVE AND FOREIGN INVESTING/SUPPLY AND DEMAND FOR COFFEE/SUPPLY AND DEMAND DEFINITION FOR 10 DIFFERENT SCENARIOS - Coursework Example

Download file to see previous pages... Possibilities of things to happen when an investor comes into the country are shown in Fig. 1. Fig. 1. Production Possibility Frontier Let us assume that Fig. 1 is the production possibility frontier of a developing economy where point X production is at maximum capacity given the scarce resources, a given technology and a given quantity of inputs. At point X, resources are not managed efficiently. Points A, B, C are possibility frontiers of an investment and presents a combination of clothing and food production of the country. At any point of combination, an investor may invest in the country. Discuss what type of foreign investments would be best for the economy’s PPF. What are the opportunity costs of these decisions? In Fig. 1, Point A is the best type of foreign investment for the developing economy. It gives clothing and food equal allocation of resources. When there is no increase in productive resources, increasing production of clothing would decrease the production of food, or vice versa. Points along the curve show the trade-off between clothing and food production. The sacrifice in the production of food is called the opportunity cost. “Opportunity cost is the cost of an alternative that must be foregone in order to pursue an action” (Investopedia). ...
There will be improvement in the productivity because of increase of capital that results to introduction of new technology and resources FIG 2. In Fig. 2, For purposes of explanation, let us assign a production quantity for food and clothing. The straight line represents the PPF that is a constant opportunity costs between two products. Increasing production of B from 60 to 90 will mean giving up 90 units of A, Scenario Two In the early part of the last decade, there was an overproduction of coffee. The price dropped so low that producers' costs were higher than the market price. The reason this happened was that market prices became high before this, and the supply of coffee increased substantially. In the meantime, demand for coffee and everything else remained the same. Coffee prices came down again, at first overshooting the former equilibrium price, throwing the coffee market into confusion. In the meantime, gourmet coffee houses began appearing, which began charging a premium for coffee in the period of falling prices. Gourmet coffee houses tend to open in high-rent areas and cater to higher income consumers. Because of the change they created for taste and preferences and the higher income market, the gourmet coffee houses had a win-win in a period of falling wholesale prices and increasing retail prices. But in the middle of the decade, the party was over, and wholesale prices started increasing because of some shortages caused by weather and the rising overall market prices again. Where is the new equilibrium price? Equilibrium price is the price set by the interaction of supply and demand. It is the price wherein the quantity demanded by consumers at a certain price and the quantity that suppliers is ...Download file to see next pagesRead More