Product Category Analysis and Evaluation - Essay Example

?PRODUCT CATEGORY ANALYSIS AND EVALUATION REPORT By 12th, December, Part one C 2. D 3. A 4. D 5. D 6. D 7.C 8. A 9. D 10. D 11. A 12. C 13. B 14. D 15. C 16. C 17. A 18. A 19. A 20. C 21. B 22. D 23. D 24. D 25. A 26. A 27. C 28. B 29. A 30. D 31. A 32. D 33. B 34. C 35. B 36. D 37. C 38. C 39. B 40. D 41. B 42. C 43. D 44. D 45. B 46. C 47. D 48. A 49. B 50. C Part two Definitions Supply curve Supply curve is a curve that shows the quantity of goods that producers are eager and ready to take to the market at the prevailing price. It shows the relationship between price and the supply of goods in the market. The figure below demonstrates the relationship of price and supply. Increase of the prices of goods in the market, results in an increase of goods supplied. Production possibilities frontier Production possibility frontier is a curve that compares the rate of production of goods. For example, if there are two kinds of goods, guns and butter, and all resources are fully employed while technology remains fixed then the production of more guns would require more resources (capital and labour) moved from production of butter to guns. Absolute advantage Absolute advantage is a term used to denote situation where some countries produce certain goods more efficiently than other countries. The cost of production of goods differs from one country to another. Moreover, the skill and technology utilised in production differs. Therefore, absolute advantage is a term used to explain the ability of a country to produce goods and services more efficiently than other countries. For example, countries that produce products like steel, automotive better than other countries are said to have an absolute advantage. Marginal utility In explaining the term marginal utility, it is important to understand the term utility. Utility is a satisfaction or a gain consumer get after consumption of a commodity. Marginal utility, therefore, explains the extra satisfaction a consumer gets after consuming an extra unit of a commodity. Marginal utility is the additional benefit or satisfaction that consumers derive when they spend additional dollar to an extra unit of a commodity or service. Marginal utility also explains the diminishing utility when consumer buys more of a product or service that they already had. Example, a family with five members will need bread for breakfast where each person’s gets three slices of bread. However, if they decide to take extra bread the satisfaction or Utils from the extra bread diminishes. Inferior goods Inferior goods are differentiated from normal goods by their response to increases in income. Unlike normal goods, the demand for inferior goods decreases as income increases. Consumers of inferior goods prefer buying high priced goods when they can afford them. For example, when incomes are low, consumers travel by bus, but when income increases people buy cars and stop travelling by bus. Therefore, bus riding decline as incomes increases. Perfectly elastic demand Elasticity of demand is the responsiveness of changes in demand as a result of factors that affect the demand for goods and service. Therefore, perfectly elastic demand is a where a small change in the affecting factor (price) causes a high or extreme response of demand. Perfectly elastic demand curve has a horizontal curve with a slope equal to zero. In the above diagram, the demand of goods is zero, and above the price of $20 while it is infinite at a price below $20. Producer surplus Producer surplus is the difference between what a producer is able to supply to the market and the actual demand that the market offer under a particular price and time. The situation where the producers are unable to satisfy the demand in the market defines producer’s surplus. Producer of goods and services face the dilemma of what they are willing and able to supply in the market and the actual amount of the price they get. This difference is referred to as the producer’s surplus. Relative price Relative prices are prices of goods in relation to other prices. It is the ratio of prices. For example, when the price of oil is $0.25 a gallon and the wage bill is $1.00 per hour than relative price of oil is 0.25 hours of labour per gallon. In addition, when the prices of oil increases to $3.00 per gallon and the wage bill increase to $30.00 then, the relative price of oil is 0.1 hours of labour per a gallon of oil. Therefore, consumers will be willing to buy more gallon of oil when the wage rate increases to $30.00 with an hourly wage of $3.00 than when the hourly wage rate is $1.00. Income effect Income effect is the changes in consumer’s behaviours as a result of increase or decreases in income at any given time. Income effect results when there is a change in demand due to changes in an individual’s discretionary income. An increase or a decrease in the price as a result of a decrease or an increase in consumer’s income, which in turn increases or decreases the demand for specific goods or other goods, is referred to as income effect. For example, a fall in price of bread to such extent that a consumer can buy more of a good or other goods as a result of increase in discretionary income. This phenomenon is known as income effect. Budget constraint (budget line) Budget constraint or budget line describes the combination of goods and services that an individual can afford with a given income. The figure above shows Sammy’s budget line. Sammy can afford any bundles that he requires below the budget line, but he cannot afford bundles above his budget line. Part Three 1. Comparative advantage Comparative advantage explains the ability of a firm or individual to produce goods or service at a lower cost compared to others firms. The production of goods and services involves the cost of labour and capital. Countries that are able to produce goods and services at a lower cost of labour, capital and cost of raw material are said to have a comparative advantage compared to other countries. Comparative advantage gives a firms and or a country ability to sell goods at a cheaper price and thus encourages division of labour and specialization. 2. a. When a service becomes more fashionable, (hair dressing) the demand curve shifts outward. An increase in demand for good or service has an effect of increasing the price and as a result of increased price, the supply of the particular good or service increases and thus a shift in demand curve. The equilibrium price and quantity move to a higher level than it was before a product became fashionable. b. Effect of decline in income as a result of recession on a normal good. In time of recession income declines as a result of economic down turn. Demand for services declines, and, as a result, the prices of the services fall consequently, the demand curve shift to the left. c. Effect of an increase in price of an essential commodity Increase in the price of an essential commodity results in a change in quantity demanded. The figure below shows the movement along the demand curve of the demand for the service as a result of price increase. d. Effect of price ceiling set above the equilibrium price Price ceiling above the equilibrium price means that the government sets prices of goods and services beyond the market equilibrium. High price of goods and service prompts the producers to maximise their profits. Price ceiling above the equilibrium price results in increased supply as producers will produce more due to high prices in the market. Therefore, the supply exceeds the demand and surpluses are created in the market. 3. Effect of imposition of minimum wage Competitive market model allows the demand for labour and wage rate to clear in the market to an equilibrium position. Nevertheless, introduction of a minimum wage brings distortion in a free market. The above figure displays a hypothetical competitive labour market. The SS is the supply curve, and DD the demand curve for labour. The interaction of the market demand and the market supply curve determines the competitive wage rate, Wc, and employment Ec. Introduction of minimum wage at Wm reduces employment to Em. The imposition of a minimum wage reduces the employment rate from Ec to Em and creates an excess supply of labour equals Ac. 4. According to Adam Smith, the expression “invisible hand” in the modern society is a process where the outcome of actors and agent in a decentralized way is without explicit agreements at all. Moreover, the actions that actors and agents engage in are not intentional. The various agents’ actions are not planned, coordinated or identical with the result, which is a by-product of the aims and actions of agents. The process of the “invisible hand” works without the knowledge of the agent. According to Adams Smith, the system he refers to as “the invisible hand” is a free market economy. According to Adam, consumers are assumed to buy goods at the lowest price, and producers or entrepreneurs choose to produce on goods that have the highest profit in the market. Therefore, the action of consumers and producers brings about the economic well being in production and consumption. Adam Smith argued that a market based economy had a positive aspect of people thinking of what other people would not. He said this was the good thing of the invisible hand. 5. In the utility maximization model, how do consumers decide how much of each kind of goods to buy? Illustrate with an indifference curve diagram. The theory of consumer behaviour follows the law of diminishing marginal utility to explain the behaviours of consumers and how they allocate their limited incomes. According to this theory, consumers allocate their incomes in such that the last dollar spent on goods yields an equal or same extra marginal utility. Read More