Microeconomics: Production Possibilities & Demand

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is the equilibrium price?

$3 (correct)

At what price does the market experience excess quantity supplied?

$2 (correct)

$4 (correct)

Which condition exists at a price of $1?

Surplus

Stable market

Equilibrium

Shortage (correct)

How many wireless earbuds are demanded at a price of $2?

8 million Signup and view all the answers

What does a decrease in price generally signal to consumers?

Greater quantity demanded Signup and view all the answers

If the quantity supplied at a price of $5 is 10 million, what is likely true?

Surplus exists at this price. Signup and view all the answers

Which of the following best describes the role of the demand curve in determining market price?

It indicates consumer preferences. Signup and view all the answers

What happens when the quantity supplied equals the quantity demanded?

Market equilibrium is achieved. Signup and view all the answers

What does a concave Production Possibilities Curve indicate about opportunity costs?

They increase as production levels change. Signup and view all the answers

Which point on the Production Possibilities Curve represents a combination of resources that cannot be attained?

Point R Signup and view all the answers

What can be inferred about the points located on the PPC?

They indicate productive efficiency. Signup and view all the answers

If 1 million additional tonnes of newsprint are produced, what is the opportunity cost in terms of forgone automobiles?

10 additional automobiles Signup and view all the answers

How does the increasing relative cost described by the PPC affect economic decision-making?

It complicates choices by altering opportunity costs dynamically. Signup and view all the answers

What does the term 'productive efficiency' mean in the context of the PPC?

Using resources at full capacity without waste. Signup and view all the answers

Why does the Production Possibilities Curve illustrate that not all possible points are attainable?

Some combinations exceed available resources and technology. Signup and view all the answers

What is a common misconception regarding the shape of the Production Possibilities Curve?

It represents fixed opportunity costs at all levels of production. Signup and view all the answers

What is the function of antitrust legislation?

To restrict the formation of monopolies Signup and view all the answers

Which of the following is an example of a public good?

National defense Signup and view all the answers

What characterizes a discouraged worker?

Someone who has stopped looking for work Signup and view all the answers

Which type of unemployment is caused by the need for workers to search for appropriate job offers?

Frictional unemployment Signup and view all the answers

What is a key characteristic of private goods?

They are subject to rival consumption Signup and view all the answers

Which of the following represents a transfer payment?

Old Age Security payments Signup and view all the answers

What percentage of noninstitutionalized persons 15 years of age and older is included in the labor force participation rate?

Those employed or seeking employment Signup and view all the answers

What type of unemployment typically occurs due to seasonal changes in demand?

Seasonal unemployment Signup and view all the answers

What does 'ceteris paribus' imply in economic analysis?

Only one variable is examined at a time while others remain constant. Signup and view all the answers

If the price of a substitute good decreases, what happens to the demand for the original good?

It decreases. Signup and view all the answers

What is demonstrated by the law of supply?

Higher prices lead to a higher quantity supplied. Signup and view all the answers

How are complementary goods affected by a price increase in one of them?

The demand for the other good decreases. Signup and view all the answers

What does an individual demand curve represent?

The quantity of a good demanded at different price levels. Signup and view all the answers

What happens to the demand for margarine if the price of butter decreases?

Demand for margarine decreases. Signup and view all the answers

What does a supply schedule illustrate?

The direct relationship between price and quantity supplied. Signup and view all the answers

If peanut butter's price decreases, what is the expected effect on the demand for jam?

Demand for jam increases. Signup and view all the answers

What type of unemployment is characterized by variations in job availability throughout the year?

Seasonal unemployment Signup and view all the answers

Which term describes a situation where there is a sustained increase in the average prices of goods and services?

Inflation Signup and view all the answers

What is the equation used to calculate the price index?

Price index = (cost of market basket today / cost of market basket in base year) × 100 Signup and view all the answers

What does the Consumer Price Index (CPI) measure?

Weighted average of prices of specific goods and services purchased by consumers Signup and view all the answers

In economic terms, what characterizes a recession?

A period where growth is consistently below the long-term trend Signup and view all the answers

How is deflation defined in an economic context?

A sustained reduction in average prices of goods and services Signup and view all the answers

Which scenario exemplifies cyclical unemployment?

An aerospace engineer laid off due to an industry downturn Signup and view all the answers

Based on the example, what is the price index computed for the market basket?

115.38 Signup and view all the answers

Study Notes

Production Possibilities Curve

The production possibilities curve (PPC) illustrates the maximum attainable combinations of two goods that can be produced with the given resources and technology.
The PPC is concave to the origin because of increasing opportunity cost.
The opportunity cost of producing one good is measured by the amount of the other good that must be forgone.
Opportunity cost is not constant due to increasing relative cost.
Points on the PPC are productively efficient.
Points outside the PPC are unattainable.
Points inside the PPC are productively inefficient.
The PPC can shift outward if there is an increase in resources, an improvement in technology, or an increase in labor productivity.

Demand

The demand schedule shows the relationship between the price of a good and the quantity demanded, holding all other factors constant.
The demand curve is a graphical representation of the demand schedule.
The law of demand states that there is an inverse relationship between the price of a good and the quantity demanded, holding other factors constant.

Shifts in Demand

Factors that can shift the demand curve include:
- Changes in income
- Changes in tastes and preferences
- Changes in the prices of related goods (substitutes and complements)
- Changes in expectations
- Changes in the number of buyers

Supply

The supply schedule shows the relationship between the price of a good and the quantity supplied, holding all other factors constant.
The supply curve is a graphical representation of the supply schedule.
The law of supply states that there is a direct relationship between the price of a good and the quantity supplied, holding other factors constant.

Shifts in Supply

Factors that can shift the supply curve include:
- Changes in input prices
- Changes in technology
- Changes in the number of sellers
- Changes in expectations
- Changes in government policies

Equilibrium Price

The equilibrium price is the price at which the quantity demanded equals the quantity supplied.
It is the price that clears the market.
The equilibrium price is determined by the intersection of the demand and supply curves.

The Economic Functions of Government

The government plays a role in the economy by:
- Providing a legal system
- Promoting competition
- Providing public goods
- Ensuring economy-wide stability

Antitrust Legislation

Antitrust legislation restricts the formation of monopolies and regulates certain anticompetitive business practices.
A monopoly is a firm that can determine the market price.

Public goods

Public goods are non-rivalrous and non-excludable.
Public goods can be consumed by many people at the same time without diminishing the amount available to others.

The Political Functions of Government

The government provides government-sponsored goods, such as museums and sports stadiums, which are deemed socially desirable.
The government inhibits certain goods, such as heroin, alcohol, and tobacco, which are deemed socially undesirable.
The government uses transfer payments, such as Old Age Security and disability payments, to provide income to individuals.
The government uses transfers in kind, such as education and health care services, to provide goods and services to individuals.

Unemployment

Categories of individuals who are without work include:
- Job losers
- Re-entrants
- Job leavers
- New entrants
Discouraged workers have stopped looking for a job because they believe they will not find a suitable one.
The labor force participation rate is the percentage of noninstitutionalized persons 15 years of age and older who are employed or seeking employment.

Types of Unemployment

Frictional unemployment is caused by the time it takes workers to search for appropriate job offers.
Structural unemployment is caused by changes in the structure of the economy, such as technological advances or globalization, that lead to a mismatch between the skills of workers and the skills demanded by employers.
Seasonal unemployment is caused by seasonal variations in demand for labor.
Cyclical unemployment is caused by contractions or recessions in economic activity.

Inflation and Deflation

Inflation is a sustained increase in the average price level of goods and services in an economy.
Deflation is a sustained decrease in the average price level of goods and services in an economy.
A price index is a measure of the cost of a market basket of goods and services relative to the cost of the same market basket in a base year.
The Consumer Price Index (CPI) is a statistical measure of a weighted average of prices of a specified set of goods and services purchased by wage earners in urban areas.

Business Fluctuations

A recession is a period of time during which the rate of growth of business activity is consistently less than its long-term trend or is negative.
A depression is an extremely severe recession.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

Explore the key concepts of the Production Possibilities Curve (PPC) and Demand in this insightful quiz. Understand how PPC illustrates efficiency and opportunity costs, and learn about the relationship between price and quantity demanded through the demand schedule. Test your knowledge on these fundamental economic concepts!