Unit 3 Assignment: Supply ✓ Solved

Unit 3 [BU224 Assignment Template] Unit 3 Assignment: Supply and Demand

In this assignment, you will demonstrate your understanding of the Production Possibility Frontier model, marginal opportunity costs, and the differences in marginal opportunity costs. You will also demonstrate your understanding of the differences between Absolute Advantage and Comparative Advantage in different situations. Additionally, you will demonstrate a clear understanding of the crucial concept of supply and demand, and the impact on the original group caused by a change in demand. In this assignment, you will be assessed based on the following Outcome: BU224-1: Examine how various supply and demand scenarios affect the way prices and quantities are set by market interactions in perfectly competitive markets.

Sample Paper For Above instruction

The concept of the Production Possibility Frontier (PPF) is fundamental in understanding the trade-offs faced by individuals, firms, and nations when allocating scarce resources. This assignment explores the PPF through various scenarios, examining marginal opportunity costs, and distinguishes between absolute and comparative advantages. It also delves into supply and demand dynamics and their influence on market prices and quantities, considering shifts due to changes in market conditions.

Understanding the Production Possibility Frontier and Opportunity Costs

The initial scenario involves a hypothetical tribe on Atlantis capable of producing two commodities: fish and wild oats. Using their maximum output options, the tribe’s PPF delineates what combinations of these goods are feasible with available resources. For example, the tribe cannot produce 800 bushels of wild oats and 5,000 kilograms of fish simultaneously if that point lies outside of their PPF boundary, which represents the maximum possible combinations of goods they can produce given their resources and technology. This is because the PPF curve reflects the opportunity cost of reallocating resources from one good to another.

At points on the PPF curve, the opportunity cost is minimized, whereas points inside the curve indicate underutilization of resources. When considering marginal opportunity costs—such as increasing wild oats production by 200 bushels—one observes that the opportunity costs differ depending on the current production level. For example, increasing oats from 300 to 500 bushels might entail sacrificing a specific quantity of fish, but increasing oats from 625 to 825 bushels might involve a different sacrifice, owing to the shape of the PPF.

The shape of the PPF curve often reflects increasing, decreasing, or constant marginal costs. A bowed-out (convex) PPF indicates increasing opportunity costs, which is typical given resource heterogeneity. As resources are reallocated, the opportunity cost of producing additional oats Typically rises, leading to a curved PPF. This shape highlights the fact that some resources are more suited for certain types of production than others, causing the marginal costs to vary.

Comparative and Absolute Advantage in Production

Moving to a different example, the production of bagels and calzones among New Yorkers and New Jersians illustrates the concepts of absolute and comparative advantage. Absolute advantage refers to the ability of a group to produce more of a good with the same resources. For instance, if New Yorkers can produce 45 pounds of bagels daily compared to the 30 pounds New Jersians can, then New Yorkers hold the absolute advantage in bagel production. This is determined by comparing maximum outputs directly.

Similarly, in calzone production, if New Yorkers can produce 30 pounds compared to 28 pounds for New Jersians, then New Yorkers also have the absolute advantage here. However, when analyzing comparative advantage, the focus shifts to opportunity costs—what each group sacrifices to produce one good over another. For example, if the opportunity cost of producing a pound of bagels is higher for New Yorkers than for Jersians, then Jersians have the comparative advantage in bagel production. Conversely, if the opportunity cost of producing calzones is lower for New Yorkers, they have the comparative advantage in calzone production.

Technological advancements, such as an improved calzone-making process for New Yorkers, can shift their production possibilities outward, potentially altering absolute and comparative advantages. For instance, enhanced technology may allow New Yorkers to produce more calzones without sacrificing bagel output, changing the scenario of comparative advantages and influencing trade decisions.

Market Supply, Demand, and Price Determination

The market for Brazilian coffee beans exemplifies how supply, demand, and price interact. By analyzing the supply schedule, where quantities supplied at various prices are listed, and the demand schedule, which varies between domestic and international markets, one can identify equilibrium prices and quantities. Equilibrium occurs at the price where the quantity supplied equals the quantity demanded, balancing both sides of the market. For example, if supply at $3,000 matches the quantity demanded domestically, then $3,000 is the equilibrium price and the corresponding quantity is the equilibrium quantity.

When international demand enters, such as Canadian consumers also purchasing Brazilian coffee, the total demand increases. Summing the quantities demanded by Brazilians and Canadians at each price creates a new demand schedule. This shifts the demand curve outward, typically resulting in a higher equilibrium price and quantity, assuming supply remains unchanged. The new equilibrium reflects increased market competition and higher prices paid by consumers.

These shifts demonstrate the responsiveness of prices and quantities to changes in market conditions. An increase in demand due to external factors, like international markets, pushes prices upward, incentivizing producers to supply more. Conversely, if supply increases, perhaps through technological improvements or increased production capacity, prices tend to fall if demand remains constant.

Understanding these principles is essential for analyzing real-world markets, as they explain how prices adjust and how resource allocation responds to changes in supply and demand. These dynamics are integral to efficient market functioning within perfectly competitive environments and influence policy decisions and business strategies.

Conclusion

This assignment highlights the importance of the Production Possibility Frontier, opportunity costs, and comparative advantages in economic decision-making. It underscores the role of supply and demand in establishing market prices and quantities and illustrates how shifts in these curves influence market outcomes. Recognizing these fundamental concepts enables a better understanding of economic behavior and resource allocation in both theoretical and real-world contexts.

References

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