ASSIGNMENT-1

ECO 101- PRINCIPLES OF MICROECONOMICS

SECTION-7; SPRING-2020

INSTRUCTOR: MUNTASIR RAHMAN

ANSWERED BY: RASHIK AHMED

ID NO: 2020-1-10-203

1. A) PPF is basically a graph that shows the combinations of output that economy can possibly
produce given the available factors of production and the available production technology.
And scarcity refers to a permanent dearth or insufficiency of resources available to people based on
their wants. Scarcity is a very important economic concept. People are restless consumers, they
always want to add something to their possessions whether they want it or need it. Sadly, only
some of the wants of them can be satisfied. Some needs are universal and necessary for example,
food and water. That’s why the people are needed to make economic choices. They could get out
more from their limited resources or they just could expand their resources in order to satisfy wants
on a greater basis. But both of possibilities requires difficult choices. That’s when the PPF graph
comes in handy. By looking at the PPF graph, one can easily decrease the production of a good
based on their needs and still can get their work done efficiently.

B) The idea of PPF has already been described in the previous question. The production possibilities
frontier can illustrate two kinds of efficiency: Productive efficiency and Allocative efficiency.

Productive efficiency means that, given the available inputs and technology, it’s impossible to
produce more of one good without decreasing the quantity of another good that’s produced.
We can be more clear by using an example. Let’s use the PPF of Food and Machinery. And let’s just
assume that the resources and labor or manpower is limited. So, if we want to increase the
production of foods, we must decrease the production of machinery. We can easily get the
opportunity cost from the slop of the PPF graph. We should balance this increase-decrease
according to the opportunity cost.

Allocative efficiency means that the particular mix of goods a society produces represents the
combination that society most desires. For example, often a society with a younger population has a
preference for production of education, over production of health care. If the society is producing
the quantity or level of education that the society demands, then the society is achieving allocative
efficiency. At the most basic level, allocative efficiency means that producers supply the quantity of
each product that consumers demand. Only one of the productively efficient choices will be the
allocative efficient choice for society as a whole. For example, in order to achieve allocative
efficiency, a society with a young population will invest more in education. As the population ages,
the society will shift resources toward health care because the older population requires more
health care than education.
 C) Where the curve lies on a graph is influenced by the resources available, which is in turn
impacted by technology, capital, labor, and so on. The curve is representative of the presence of
opportunity cost when having limited resources causes an organization to choose between two
options. The curve takes a bow because of this opportunity cost; there is an increase in the
opportunity cost of producing a good when more resources are dedicated to that good's
production. The reasons for this concave looking PPF is that factors of production don't possess
uniform skills and are not equally efficient in producing different goods. In order to increase output
of a product, one has to give up some units of the other product as resources are scarce. As stated
earlier, factors of production don't possess uniform skills so higher and higher costs in terms of
retraining and wastage have to be incurred when resource, less suitable to the production of a
product, are allocated to its production. That’s why, whenever we talk about this curve, we always
mention the opportunity cost and the quantity produced.

2. A) Marginal Cost: Marginal cost is the additional cost incurred in the production of one more unit of
a good or service. It is derived from the variable cost of production, given that fixed costs do not
change as output changes, hence no additional fixed cost is incurred in producing another unit of a
good or service once production has already started. It is calculated by the change in the total cost
divided by the change in the product output.
B) Marginal Benefit: A marginal benefit is the maximum amount of money a consumer is willing to
pay for an additional good or service. The consumer's satisfaction tends to decrease as consumption
increases. The marginal cost, which is directly felt by the producer, is the change in cost when an
additional unit of a good or service is produced. It is calculated by the change in total benefit
divided by change in quantity.

B) The marginal benefit is the benefit that is obtained by getting one more unit of a good or service.
The marginal benefit of a good changes the quantity produced of it increases. Because additional
units lead to a decreasing marginal benefit from it.

3. A) There’s now a shortage of milk due to the severe drought. So now, the production of Ice-Cream
will be reduced and so will the quantity supplied. Hence, the price will rise. The demand of Ice-
Cream will fall. This process will keep on repeat until there’s an equilibrium of supply and demand
at the market.

B) People might read the article and know of the health benefit that they can get by consuming
chocolate. Now, there’s a high demand of chocolates because people now know of the benefits. The
quantity demanded will increase. And the price will start to rise again. This will continue until both
of them come to an equilibrium.

C) There’s now a competition of the Chocolate Ice-Cream. And their manufacturing cost is also
lower. So, the quantity supplied of Vanilla Ice-Cream will now increase. The price will decrease a bit.
The quantity demanded will get up. This will continue until both of them come to an equilibrium.

D) Because of the new technology, the manufacturing cost of Chocolate Ice-Cream will now
decrease. So now, they will be able to produce more and more. The quantity supplied will increase
 And the market price will decrease. There’ll be a great demand of Chocolate Ice-Cream in the
market. This process will keep on repeat until there’s an equilibrium of supply and demand at the
market.

4. A) Equilibrium Price: The price at which the quantity demanded equals the quantity supplied.

B) Given, QD = 10 – 4P
QS = -2 + 8P

Now,
10 – 4P = - 2 + 8P
=> 12P = 12
=> P* = 1
So, Equilibrium quantity demanded Q D = 10 – 4 = 6
Equilibrium quantity supplied Q S = 8 – 2 = 6.
5. A)

The Equilibrium Price and Quantity is $15 and 600kgs respectively.