Understanding the Production Possibility Frontier (PPF) and Market Equilibrium: Concepts, Assumptions, and Applications

Understanding the Production Possibility Frontier (PPF) and Market Equilibrium: Concepts, Assumptions, and Applications

What the Production Possibility Frontier (PPF) is. Clearly articulate the assumptions and characteristics of the Production Possibility Frontier (PPF).  Newland typically requires 3,000 bicycles and 18,000 automobiles. Newland abruptly gets notification that the demand has escalated to 4,000 bicycles and 20,000 autos. Examine and explain at least three potential strategies via which Newland may satisfy that desire.  (Note: Specify any relevant assumptions used)

What are the equilibrium price and quantity in the market? What is the reason?

(a) Assume a novel dip elevates the demand for potato chips by 30 million bags weekly at every price point. What factors influence the fluctuations in the demand and/or supply of chips? Furthermore, explain the alterations in the pricing and amount of chips. Illustrate the modifications on a graph. 

The demand for potato chips rises by 30 million bags each week at every pricing point. Assume concurrently that a novel kind of potato enhances the yield of potato crops, resulting in a weekly increase of 40 million bags of potato chips produced at every price point. Elucidate the changes in the market equilibrium price and quantity of chips. What are the new equilibrium price and quantity in the market? Illustrate the modifications on a graph. 

Market experts project that the price elasticity of demand for domestic beef is –1.30. What would be the decrease in the price of domestic beef if the demand for it rises by 6.5 percent? Nonetheless, this decline in price results in a 4 percent reduction in the amount needed for imported beef.What is the cross-price elasticity of demand for imported beef in relation to the price of domestic beef? Does the flexibility suggest that indigenous beef and imported beef are alternatives or complements?

Analysis of Equilibrium

1. The production possibility frontier (PPF) is shown here, with vehicles represented on the X-axis and bicycles on the Y-axis.
2. A PPF is the set of combinations of two items that may be produced inside an economy, given its available resources and existing technology. It presumes:

• The quantity of accessible resources remains constant. This level encompasses the physical units and the efficiency levels, which remain invariant for each PPF generated.
• Technology is unchanging.

NewLand has the capacity to manufacture a maximum of 3,000 vehicles or 5,000 bicycles.

CHARACTERISTICS:

• Any point inside the PPC indicates that resources are underutilized. This phenomenon is often referred to as productive inefficiency.
• Any point beyond the Production Possibility Curve (PPC) is unattainable unless there is a shift in technology, resource availability, or productivity levels of resources.
• A point on the PPC indicates productive efficiency, since all resources are fully used.
• The PPC is concave to the origin, indicating that the opportunity costs of producing automobiles are rising.

1. We must augment the number of bicycles from 3,000 to 4,000 and the number of autos from 18,000 to 20,000. The evidence indicates that we cannot continue on the PPC to achieve this. If we need 4000 bicycles, we can produce just 10,000 vehicles. We must augment the PPC to achieve our objective. this may be achieved by the following methods:
2. An increase in resource levels may expand the production possibility curve outward.
3. An enhancement in the productivity of available resources may move the Production Possibility Curve outward once again.
4. Trade serves as an alternative method to extend the Production Possibility Curve when domestic limitations hinder development.

Question 1: Section II

• Equilibrium occurs at the intersection of the demand curve and the supply curve. The equilibrium price is $65, and the quantity is 145.
• An increase in demand is represented by a rightward shift of the demand curve, as shown.(transition from blue to green)

The new equilibrium occurs when demand matches supply. Price = $80 and quantity = 160 million bags.

1. There is now an increase in supply, represented as the new Qs. The new equilibrium is established when fresh demand matches new supply.

The new equilibrium is established at a price of $60 and a quantity of 180 million bags.

1. Income elasticity of demand for concert tickets is the percentage change in demand divided by the percentage change in income.

The percentage change in income is calculated as (170-130)/130 = 30.76%, or around 30%.

The income elasticity of demand for concert tickets is calculated as +15/+30 = 0.5.

This is a usual good, since the indicator is positive.

 Income elasticity of demand for bus trips = Percentage change in demand / Percentage change in income

The income elasticity of demand for bus trips is calculated as -10 divided by +30, resulting in -0.33.

Bus travels are classified as an inferior good due to the negative elasticity coefficient.

According to the definition. Price elasticity of demand for sushi in relation to sushi

Elasticity of demand for sushi is calculated as the percentage change in demand for sushi divided by the percentage change in the price of sushi.

demand is inelastic with a price elasticity of -0.2

The cross price elasticity of demand for soy sauce in relation to the price of sushi is equal to.

=% change in demand for soy source/% change in price of sushi

= +2/+5 = 0.4.

A positive cross elasticity indicates that the goods are substitutes. Sauce serves as an alternative for sushi when the price of sushi increases.

1. The elasticity of demand for domestic beef is defined as the percentage change in demand for beef divided by the percentage change in price, resulting in a value of -1.3.

The percentage change in domestic price equals the percentage change in demand for beef divided by the price elasticity of demand.

= +6.5/-1.3 = -5 or a 5% decrease in price.

Cross-price elasticity of imported beef relative to domestic beef

Percentage change in demand for imported beef divided by percentage change in domestic pricing is -4 divided by -5, resulting in 0.8.

 A positive correlation indicates that they are replacements for one another. Consumers replace domestic beef with imported meat as the price of domestic beef increases.  

In a free market Equilibrium occurs when demand matches supply, with a price of $250 per tonne and a quantity of 1000 kilotonnes. When a pricing floor is implemented, we may illustrate several locations to demonstrate the alterations in consumer and producer surplus.

With a price restriction set at $300 per tonne, there exists an imbalance since demand is less than supply. This discrepancy is referred to as a surplus of 400 kilotonnes, calculated as 1200 minus 800.

Deadweight loss is shown in green. It is characterized as the diminution of consumer and producer welfare resulting from price regulation. The area of the triangle is calculated as follows: ½ * 400 * (300 - 250) = 10,000.

For alternative values, we use the following computations using the values shown in the figure.

A = ½ * (400 - 300) * 800 = 40000

B1 = (300 - 250) * 800 = 40,000

B2 = (250 - 200) * 800 = 40,000

C = ½ * (200 - 100) * 800 = 40000

E = ½ * (300 - 250) * (1000 - 800) = 5000

D = ½ * (250 - 200) * (1000 - 800) = 5000

A + B1 + E = 40000 + 40000 + 5000 = 85000

D + B2 + C = 40000 + 40000 + 5000 = 85000

B1 + B2 + C = 40,000 + 40,000 + 40,000 = 120,000

Change in consumer surplus = 40000 - 85000 = -45000

Change in producer surplus equals 120,000 minus 85,000, resulting in 35,000.

Deadweight loss = -45000 + 35000 = -10000

Question 3: Section II

The domestic pricing is denoted as Pdom. Quotas are shown as Q1-D1. This is also equivalent to imports, hence P import represents the import price. Imports result in reduced prices, but consumption quantity increases. Overall, society is improved since the benefit is equivalent to area D = (+B+D-B)

1. Current imports (in blue) exceed quotas (in red), as shown in a new graphic. By comparing the two scenarios, we can demonstrate that:

• The price under quota exceeds that of free trade imports. Pquota exceeds Pimport. This benefits domestic producers, since they may provide more at P quota than at P import.
• Consumers are disadvantaged since they incur a greater cost compared to scenario A.
• The societal advantage is diminished. Previously, the advantage included C, E, F, and G; it has since been reduced to C alone.

All pertinent information is annotated in the conventional demand-supply diagram. We illustrate the alterations in consumer surplus and producer surplus using notations in the table below. A plus sign indicates an increase, while a negative sign denotes a drop or loss.  
 

Using mathematical concepts of areas we show the following:

AREA D (triangle)= .5*(5.6-4)*(250-125) = 87.5

AREA C = .5*(250-125) *1.6  +1.6 * 125  = 87.5 +200 =287.5

AREA E (rectangle)= (500-250) *1.6 = 400

AREA F (triangle) = .5*( 5.6-4) *(625-500) = 87.5

change in consumer surplus = loss of $862.5

change in producer surplus = gain of $287.5

Revenue from tariff = gain of $400

References

Study notes: Explaining Consumer surplus, available from:https://www.tutor2u.net/economics/reference/consumer-surplus [6 April 2017]     

https://www.freeeconhelp.com/2011/10/how-to-calculate-deadweight-loss-easy-4.html [6 April 2017]

Chen. C. 2007, Principles of Microeconomics Fall 2007, available from:https://ocw.mit.edu/courses/economics/14-01-principles-of-microeconomics-fall-2007/lecture-notes/14_01_lec17.pdf  [7 April 2017]

Pettingar. T. 2015  Effect of import quota,  available from” https://www.economicshelp.org/blog/glossary/effect-of-import-quotas/ [7 April 2017]

Import quotas available from https://economia.unipv.it/pagp/pagine_personali/msassi/readinglist/doc2.pdf   [10 April 2017]

 Import quotas , available from https://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=import+quotas  [ 9 April 2017]

Johnson. M., Economics Basics: Supply and Demand, available from  https://www.sophia.org/tutorials/economic-basics-supply-and-demand [9 April 2017]

Econport, Impacts of shifts in demand and supply 2006, available from https://www.econport.org/content/handbook/Equilibrium/Impact-.html  [9 April 2017]