Pacc6007 Economics For Production Capacity Assessment Answers

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1. In your own words, while making use of the graph that you have created in part 1, explain what the PPF is.

2. District D usually has a demand of 3,000 Schmeckt Gut 2.0 and 18,000 Schmeckt Gut Energy Bars. Suddenly we receive notice that the demand has increased to 4,000 Schmeckt Gut 2.0 and 20,000 Schmeckt Gut Energy Bars.

a. Discuss and explain at least three possibilities how we could meet that demand.
Hint: Make appropriate assumptions.
b. For each solution that you have identified and discussed above, explain whether or not your solution is sustainable.

Answers:

PPF of production capacity of Schmeckt Gut:

The concept of trade off and opportunity costs that affects economic growth is illustrated by production possibility frontier. Frontier depicts the maximum possible combinations of two or more goods by making efficient utilization of all resources (Barberis 2013). In the given case, it is the point at which the economy of business is efficiently utilized for producing the goods and resulting in allocation of resources in best possible way.

Initially, the demand of Schemckt Gut stood 2.0 at 3000 and that of Schemckt Gut energy bars stood at 18000. Now, the demand, for both the production capacity has increased to 4000 and 20000. This would require an increase in factor resources and increase in production capacity. Some of the assumptions for meeting the increased demand is improvement in technology and increase in factor resources (Davis 2013).

The equilibrium market price and quantity is determined at the point where market demand is equivalent to supply.

Demand equation for energy bars:

Supply equation of energy bars:

At equilibrium, we have

600= 3

Now, substituting value of demand in above equation

Therefore, equilibrium market quantity is 200 units and equilibrium price is 400

According to law of demand, an increase in the price of commodity has an inverse impact on quantity demand of commodities other factors affecting the demand should remain constant. If there is subsequent increase in price by 1$, then at new price would be $ 401. Now, substituting this price in demand equation.

401= 800-

Now, putting value of new price in supply equation.

Therefore, as per demand and supply concept, quantity demanded has decreased and quantity supply has decreased.

The pricing decisions of business firms is largely impacted by concept of elasticity and this concept is considered in taking decisions regarding pricing of goods. Fixation of profit maximizing price will be done using elasticity of demand concept. Elasticity helps in providing information about market behavior and it helps in measuring the economic quantities responsiveness. Elasticity affects the ability of business to increase the price of products (Welch and Welch 2016). Assumptions of elasticity helps business in making pricing decisions.

The Schmeckt Besser energy bar can be smoothly introduced in the market by considering the elasticity effects because several, types of elasticity affect certain products. Elasticity concepts also considers the target market for which the products are introduced. Different target market affects different segments of consumers in different way. Business are able to determine price ranges of entire line of products. Information generated by different consumers and their responsiveness to the introduced products will help in smoothly introducing the products (Negishi 2014).

Problem B:

There are two set of price at which the total revenue of Schmeckt Gut will be maximized.

Total revenue at $ 1.50= price * quantity = 1.50* 25= 37.5

Total revenue at $ 2.50= price * quantity = 2.50*15 = 3.75

Total revenue generated at both the price is maximum and same.

_po= $ 1

P₁= $ 2

Q_o= 30000

Q₁= 20000

Price elasticity of demand = [Q₁- Q_o/ Q_o]/ [P₁- P_o]/ P_o = 0.33/ 1= -0.33

P_o= $ 1

P₂= $ 1.5

Q_o= 30000

Q₂= 25000

Price elasticity of demand = [Q₂- Q_o/ Q_o]/ [P₂- P_o]/ P_o = 0.1667/ 0.5= -3.34

The value of price elasticity of demand indicates that demand is highly sensitive to changes in price.

Cross price, elasticity of demand is calculated by percentage increase in quantity demanded one product by percentage of increase in price of another product.

Change in quantity demanded of energy bars due to decrease in its own price

Q_2x= 20000

Q_1x= 10000

P_1x= 3

P_2x= 2

Q_2y= 9000

Q_1y= 11000

Percentage change in price of energy bars = - 0.333

Percentage change in quantity of high energy bars= .181

Cross price elasticity of demand for Fly High’s energy bars sold with respect to the price of our Schmeckt Gut Energy Bar = - 0.333/ .181 = 1.84

Fly High Energy Bars and Schmeckt Gut Energy Bars are regarded as substitute goods as per the investigation by board of Schmeckt Gut. This is so because a decline in price of one goods will reduce the quantity demanded of other goods. In the given case, a decrease in Schmeckt Gut Energy Bar price is reducing the quantity demanded of Fly High’s energy bars.

Instruction:

Problem A:

The different types of market structure comprise of monopoly, monopolistic competition, oligopoly and perfect competition.

Under perfect competition, there are large number of sellers and buyers and influence of either parties is negligible. The equilibrium market price and quantity demanded depended upon the market interactions (Ivanov and Sotnikova 2013). In order to have smooth introduction of Schmeckt Besser energy bar under this particular market structure, the price of product should be in par with prevailing market price.

Under oligopoly market, there are few sellers selling differentiated products. Therefore, for the introduction of new products requires a lot of advertisement and spends considerable amount of money on advertising activities (Hodgson 2014). Policy regarding price is another strategic variables to be taken into consideration.

One single seller characterizes monopoly market with large number of consumers. For smooth introduction of product under this market structure, organization would employ certain marketing campaign for making the products popular and available for use to customers.

Monopolistic competition uses the cost of production for taking decisions about price and output produced. Each firms under this market structure sells products that is slightly different from each other. Smooth introduction of the product can be done by following different distribution channel from its competitors and by employing different promotional techniques and having distinctive packaging (Hirschey 2016).

Problem B:

Schmeckt Gut has the market structure of monopolistic competition. The Research Department of Schmeckt Gut needs to undertake specific tasks in reference to analysis of market for introducing the product. Schmeckt Gut can consider the pricing decisions of the product based on the concept of cost. Various costs such as fixed costs, variable costs and imputed costs. Cost function helps in determining the price of product. The firm would be acting independently and it would have given cost curves on which profit of the newly introduced products are maximized. Maximization of profit and minimization of loss by the firm is done at the point at which the marginal revenue is equal to marginal costs (Ehrenberg and Smith 2016). In the end, demand of the product becomes equivalent to long run average cost. They want to attain situation of no economic profit where price is equivalent to average cost.

Reference:

Barberis, N.C., 2013. Thirty years of prospect theory in economics: A review and assessment. The Journal of Economic Perspectives, 27(1), pp.173-195.

Davis, J.B., 2013. The theory of the individual in economics: Identity and value. Routledge.

Ehrenberg, R.G. and Smith, R.S., 2016. Modern labor economics: Theory and public policy. Routledge.

Eichhorn, W. ed., 2013. Measurement in Economics: Theory and Applications of Economics Indices. Springer Science & Business Media.

Hirschey, M., 2016. Managerial economics. Cengage Learning.

Hodgson, G.M., 2014. Economics in the Shadows of Darwin and Marx. Edward Elgar Publishing.

Ivanov, Y.N. and Sotnikova, R.A., 2013. Theoretical Economics. Theory of Optimal Enterprise. M: Publishing house LENAND.

McCabe, M.J. and Snyder, C.M., 2015. Does online availability increase citations? Theory and evidence from a panel of economics and business journals. Review of Economics and Statistics, 97(1), pp.144-165.

Negishi, T., 2014. History of economic theory (Vol. 26). Elsevier.

North, D.C., 2016. Institutions and economic theory. The American Economist, 61(1), pp.72-76.

Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill.

Ruegg, R. and Marshall, H., 2013. Building economics: theory and practice. Springer Science & Business Media.

Welch, P.J. and Welch, G.F., 2016. Economics, Binder Ready Version: Theory and Practice. John Wiley & Sons.

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