Economics and Production Possibilities Curve

Soha Oean Problem #1: Using either a graph or table (Refer to page 22 for help with graphs and tables) use two goods to construct a production possibilities curve. Clearly explain what a variety of different points on the curve mean. What would make the curve expand or contract? Why is efficiency lost at the extremes, as when substantially more of one good and very little of another is produced? Answers:- To construct this curve we need four assumptions:- 1-The economy produces just two goods example Cars and Tractors. 2-There is finite amount of resources available example land, labor and capital. -The resources are used efficiently. 4-The methods of production that are used does not change or technology does not change. The production possibilities curve will be helpful in understanding the need to make choices and the role of opportunity cost when resources are scarce. In our example Tractors and Cars as the economy two goods, if society decided on producing only Tractors the production will hit its maximum level. In the other hand the cars production will be zero. One Tractor =2 Car, the opportunity cost of producing one Tractor is 2 cars. That takes more time and resources to produce one Tractor than car.

By looking at the table A or graph A, we have an inverse relationship because the two variables change in opposite direction, 1 Tractor = 2 Cars. When car number decrease, Tractor no increase, and when car number increase, tractors number decreases. “The six data points in the table A are plotted in the graph. Observe that an inverse relationship always graphs as a down sloping line”. (McConnell,2012 ). Curve will expand when 2 goods are produced efficiently example if I chose to produce one Tractor and 2 cars then we are producing less than our capacity even though we have the resource to produce more.

Basically what makes the curve expand is when there are grows in economy its production possibilities curve will expand because more can be produced conversely, the production possibilities curve will contract with economic growth meaning less can be produced. When we shift our resources toward making only tractor or only car, if we increase the cars only than the Tractors , then the production will be less efficient and we have higher opportunity cost because it can cost a lot higher to reallocate resources than simply handing over the metal that was meant for tractors to the care manufacture. Applying the Production Possibilities Model) Supply reflects the marginal cost (CM) of producing the good. “The market ensures that firms produce all units of goods for which MB exceeds MC and no units for which MC exceeds MB. At the intersection of the demand and supply curves, MB equals MC and allocative efficiency results. ” (McConnell pg. 59) Table A Points TractorsCars A010 B18 C26 D34 E42 F50 Graph A Reference: Applying the Production Possibilities Model – Free Video … (n. d. ). Retrieved from http://education-portal. com/academy/lesson/applying-the-production-possibilities McConnell? Brue? Flynn: Microeconomics: Principles … n. d. ). Retrieved from http://www. scribd. com/doc/26127377/McConnell%E2%88%92Brue%E2%88%92Flynn-Microeco Problem #2 Part A: Go to the internet auction site eBay® at www. ebay. com and select the category Jewelry and Watches, followed by Loose Diamonds and Gemstones, and then Diamonds, Natural. How many natural diamonds are for sale at the moment? Note the wide array of sizes and prices of the diamonds. In what sense is there competition among the sellers in this market? How does that competition influence prices? In what sense is there competition among buyers? How does that competition influence prices?

Answers:- Active listings are 726,550 as of 10/26/2012 at 1:54pm. Sellers are ratings play a big part in this competition as well as direct reputation. Reputation is a powerful force to make firms behave well, even when they supply highly complicated products. Whenever there are many buyers and few sellers price will rice. “The limited supply of diamonds is also controlled by a few large companies. Many have argued that these companies have supported high prices by artificially limiting supply. Greater competition among the major jewelry suppliers may lead to lower prices”. ( Diamond Grading and Buying Guide).

The demand for diamond is generally measured in relation to the manufacturing capacity, at the moment there is a manufacturing over- capacity. In the medium to short term, there will be inadequate natural diamond available. (Diamond Grading and Buying Guide) Sellers compete in price which is varying according to diamonds quality, color, clarity, cut and size. There are over 16,000 different polished diamond prices. Since price is determined by supply and demand, then there are many sellers and buyers similar products are supposed to be identical. All sellers and buyers have full knowledge of market conditions and sellers nd buyers can enter the market or leave the market at will. If large quantities of Diamonds were suddenly found and was available for sale, price of diamonds would fall. Diamond Grading and Buying Guide – Jewelry by LuShae. ” Insert Name of Site in Italics. N. p. , n. d. Web. 30 Oct. 2012 . Problem #2 Part B: Describe what would happen if an outside agency determined the prices eBay could charge. I believe the idea for having eBay is to be able to find a deal and to bargain with customers you would normally not be able to interact with because of the cost of travel and business to locate these items.

All of these economic actors participate in the market in order to achieve specific goals. Consumers aim to maximize their own happiness; businesses attempt to maximize profits and government agencies try to maximize social welfare. Foreigners pursue these same goals as producers, consumers or government agencies. In every case, they pursue to achieve these goals by buying the best possible mix of services, goods or factors of production. If an outside agency try to determine the eBay price, example a ceiling price this lower price seemingly makes diamond more affordable for everyone, including the poor.

But what about the quantity of diamond supplied? Diamond controls do not increase the number of diamonds available. On the contrary, price controls tend to have the opposite effect. Price ceilings have three predictable effects they:- • Increase the quantity demanded. • Decrease the quantity supplied. • Create a market shortage. (Supply and Demand) Some suppliers simply decided that selling their diamond was no longer worth the effort. They decided, instead, to leave the market. Other suppliers will sell cheap and less quality diamonds, Slowly but surely the quantity of