Production possibility curve and different costs

Question 1 (b) Assuming that the country is currently producing 40 units of goods and 70 units of services, what is the opportunity cost of producing another 10 units of goods?

The opportunity cost of producing another 10 units of goods is 5 units of services.

Question 1 (c) Explain how the figures illustrate the principle of increasing opportunity cost.

From the production possibility curve, at point A, the managerial department chooses to produce 100 units of goods and 0 units of services. It is because the management is having difficulties to produce units of services. It is such as scarcity towards resources. The production of services depends on labor power, capital, machineries, land, raw materials and most importantly, the manager (entrepreneur). When labor power is insufficient, there is no one to handle the machineries in the production of services, therefore 0 units of services are produce.

At point B, 60 units of goods are produce by the country and 58 units of services are also produced. The units of goods and services are almost the same, 60 units of goods compared to 58 units of services. The management department balances the production of both goods and services so that both products can equally satisfy consumer’s needs and demand in the country. At point B, the opportunity cost of 60 units of goods is 22 units of services. As for the production of 58 units of services, the opportunity cost is 40 units of goods. The management department has to sacrifice the production of 22 units of services and 40 units of goods in order to produce 60 units of goods and 58 units of services. There is no perfect amount of goods and services to be produce due to insufficient capital and resources. The management will have to research and find a best way to maximize production. The second best decision must be sacrifice in order to allow the first choice to be in the market as the management department will have to try to increase the capital as to produce more goods and services in future to meet consumers demand.

As for point C, 50 units of goods are produce and 65 units of services are also produce. The opportunity cost of units of services has increase by 10 units of goods, where the opportunity cost of units of goods decreases in 7 units compared to point B. It is because another 7 units of services are produce from point B in reduction of 10 units of goods produced. In this case, the management department chooses to produce 7 more units of services because of availability in production. Resources available is enough to produce more units of services, therefore, the management department increases the units of services. Here, the management department does not choose to sacrifice all units of goods but just decrease the production of 10 units of goods. It is because there is still demand in the market, and there are still resources to produce 50 units of goods.

Lastly at point D, only 80 units of services are produce while 0 units of goods are produce. It is incapability of management department on using resources, that’s why the market is unable to produce any goods. Resources are wasted when management department do not manage the resources efficiently. When the production point is seen below the line of production, as shown at point E in the production possibility curve, it is wastage in production. Wastage in the production results the management to unable to achieve any of the production targeted or planned, losing profit to the unnecessary cost, producing lesser than expected.

In order to overcome problems of scarcity, research and develop group in the business can be employ to produce more units of goods and services efficiently. Efficient decisions must be made by the management department in using resources to reduce wastage of resources in the business. The management department should also monitor the cost of production at all times, for at most times, the cost will cause a business to collapse and cause the production possibility curve to move inwards with less production. Therefore the management department should always minimize the expenses and cost as it is also competitive advantage. For example in Jusco, applying for a J-card has many privileges when it comes to J-card Day. From 3th May 2011 to 31th May 2011, there are special low price items only for J-card members resulting customer to shop more during the promotion period. Thus, prove that the cheap promotion items are the competitive advantage. However, the cost also can represent the reputation of one’s company. When the management department packs the product attractively, the customers will still purchase the product even though it is expensive due to favoritism and taste towards the item. In this way, the business can be expanded and the production possibility curve will move outwards in time, in more production of goods and services. . Improvements in technology are also a factor to be more productive without using more capital. For example, with improvements in technology in South Korea, the country applies structural vector auto regression (VAR) models on Korea data. It increases production tremendously, and finishes production in extreme speed which cut short the time worked.

Question 1 (d) Now assume that technical progress leads to a 10 percent increase in output of goods for any amount of resources. Draw the new production possibility curve. How has the opportunity cost of producing extra units of services altered?

Units of Goods

0

11

22

33

44

55

66

77

88

99

110

Units of Services

80

79

77

74

70

65

58

48

35

19

0

The Market of a Country

Based on the new production possibility curve, the opportunity cost of producing extra units of services has increase, compared to the previous production possibility curve. Due to the 10 percent more of production in units of goods, now 10 percent more opportunity cost is shown in the graph when the management department chooses to produce more units of services, compared to the last production possibility curve. For example, if the management department chooses to produce 58 units of services, the opportunity cost of the units of services has increase by 6 more units of goods compared to the opportunity cost in the previous production possibility curve at the same production of 58 units of services.

Even though the production of goods has increase, however the management department still chooses to produce extra units of services. In process of production, the major problem is scarcity. It causes unavailability of product to be produce. The units of goods are scarce, that is why the management department will have to choose to units of services instead of units of goods even though the production will be lesser. When the resources of goods is scarce, the price of the resources will increase, it will cause the expenses and cost to be higher in order to produce the amount of goods, which the management department will not do so for it cause lesser profit in the business with limited amount of capital to produce goods at hands. Therefore the management department will choose to produce extra units of services compared to units of goods therefore the opportunity cost of units of services will increase. Besides, it might also be the demand towards the services has increase, therefore the management chooses to produce the services according to the consumers demand towards the services even though the management department can produce more goods resulting the opportunity cost of services to increase.

The solution to decrease the opportunity cost in units of services is in the hands of the managerial experts. The management department should balance and consist efficiency of land, raw materials, labors, and return of investment (profit) in order to produce more goods according to consumers demand efficiently. The management department should increase the quantity of employees to be more productive. The management department should also go directly to the manufacturers to negotiate the price of raw materials to decrease the cost, which adds more to the production in units of goods.

Question 2 The weekly demand and supply schedules for t-shirts ( in millions ) in a free market are as follows:

Question 1 (a) What are the equilibrium price and quantity?

The equilibrium price and quantity is when the price of quantity demanded equals to the price of the quantity supplied, where the point intercepts. Through the table, the equilibrium of the price is 5 when the quantity demanded and the quantity supplied is 12 million. At point Z in the graph, the demand towards the t-shirt is 18 million, however the supplier could only produce 6 million t-shirts at point Y, therefore the shortage occurs. It is when the supplier fails to fulfill the customers demand, which result the quantity demanded to be more than the quantity supply. Upon facing a shortage issue, the management department should increase the price of the t-shirt so that some people cannot afford to buy the t-shirt and turn to other substitute product. At point W, the demand towards t-shirts is 8 million, however the supply of the t-shirts are 16 million, causing surplus of 8 million t-shirts in production. To encounter surplus problem, the management department should decrease the price to attract more customers to purchase the

t-shirt.

Based on the graph, the quantity of demand has a negative relationship with the price of t-shirts. It is stated at point Z when the demand for the t-shirts is 18 million, the price of the t-shirt at the price of two ringgit. However when the price increases to seven ringgit, the demand towards the t-shirt has decrease from 18 million at point Z to 8 million at point W. The demand curve slopes down because of law of demand. Therefore the higher the price of the t-shirt, the lesser demand towards the t-shirt. However the supply curve slopes up for it has positive relationship with the price of the t-shirt. It is stated point Y, where the supply is 6 million, the price of the t-shirt is two ringgit. When the supply of t-shirt increases to 16 million at point X, the price of the t-shirt also increases from two ringgit at point Y to seven ringgit.

Question 1 (b) Assume that changes in fashion cause the demand for t-shirts to rise by 4 million at each price. What will be the new equilibrium price and quantity? Has the equilibrium quantity risen as much as the rise in demand? Explain why or not.

Based on the new table where quantity demand is the same as quantity supplied at the price of RM 6. The quantity of people willing to pay the price of t-shirt at RM6 is 14 million. The equilibrium quantity compared to the last equilibrium quantity has increase from 12 million to 14 million, which are 2 million increments from to. In the quantity of demand, the increment is 4 million which is shown from point A to point B. At point A, the quantity of demanded is 8 million in the previous graph while in the new graph the quantity of demanded is 12 million, both at the same price of RM7.Judge from the new graph, the quantity of demand has not follow the concept of law of demand which is stated that if the price increases the demand will decrease. Even though the price has increase by RM1, however it does not affect the increment of the demand of 2 million. It is because the demand has increase due to impact from the trend and fashion which has no involvement in the price adjustment. The customers buys the t-shirt according to owns tastes and favors as buying can satisfy the customer and improve the country’s standard of living. However, the new graph stated the concepts of ‘law of supply’, which supply will increase when the price increase. The price has increase by RM1 from RM5 to RM6, thus the supply of the t-shirts has increase two million. However, the equilibrium quantity has not risen as much as the demand for the equilibrium quantity for it has only increase 2 million t-shirts compared to increment of 4 million of t-shirts towards demand. In this case, the supply of t-shirts has not increase according to the demand. The supplier of t-shirts should increase another 2 million of t-shirts to increase quantity of the profit and meet the quantity demand toward t-shirts. However, scarcity is the barrier of demand and supply, scarcity towards human resources, land, capital and entrepreneur causes the shortage supply of the product causing the quantity of supply to be unable to meet the quantity of demand. In some cases, the management department will not choose to increase the supply of the product due to maintain the reputation of the company. For example, Louis Vuitton only produces one unit of “empreinte pendant” to maintain it’s unique of the product and the reputation of the company towards luxury items. It is because if the company produces more, people who can afford the “empreinte pendant” can own it, therefore the product will no longer be unique, and Louis Vuitton cannot remain its reputation in producing luxury item, for the value of the production will drop if too many people can own the same product.

However, the disadvantage of not be able to increase the supply of t-shirts are customers will give up buying the t-shirts from this seller and purchase it from other sellers resulting in lesser profit towards the t-shirts.

As conclusion from the graph, it is stated that when the demand in the market reduce, the supplier will also reduce the supplies and the price of the product will also drop. But if the price is reduce, it causes the demand to be higher for it is cheap, thus the quantity of supply will increase for suppliers to earn more profit. The new graph shows increment of 2 million in the quantity of the t-shirt from 12 million of t-shirts to 14 million of t-shirts, from to. The new profit of each t-shirt is RM6 in additional RM1 compared towards RM5 in the previous graph from to .