a) Explain the basic economic concepts using the production possibilities curve(PPC)
Let us assume that a JASMINE produces two products- trucks and boats. The PPC for trucks and boats shows the limits to the production of these two goods, given the total resources available to produce them.
The basic economic concepts are: Scarcity, choices and opportunity cost.
Point on A, B, C shows the first basic concept of CHOICES. If JASMINE is using its resources in an efficient way, then it is not possible to produce more of one good without producing less of another. JASMINE will have to make choices whether point A or point B or point C to maximize its satisfaction. On the PPF, every CHOICE ...view middle of the document...
b) Distinguish between cardinal utility and ordinal utility.
Based on the cardinal utility theory, it is stated that the utility is measurable by placing a number of alternatives where the utility can be added. It is measured in terms of utils (the units on a scale of utility or satisfaction.) Therefore, cardinal utility is a quantitative method. Besides, according to cardinal utility, a customer derive his satisfaction through the consumption from only one good at a time.
Based on the ordinal utility theory, the utility is not measurable but can be compared. The ordinal utility uses a ranking system in which ranking is provided to the satisfaction that is derived from consumption. So, this utility can be said as a qualitative method. What differs ordinal utility from cardinal utility is that a customer derive his satisfaction from the consumption of a combination of goods and services, which will then be ranked according to preference.
C) Using appropriate diagrams,explain the five degrees of price elasticity of demand (PED).
Relatively Elastic Demand ( Ed>1)
Elastic demand is a condition in which a small percentage change in price will lead to a large percentage change In quantity demanded. Percentage change in quantity demanded is greater than percentage change in price ( %∆Qd>%∆P ).For example, when the price of chip decrease by 20%, the quantity demanded for the chip will increase 40%.This happens when there are many good with high substitutes in the marketplace such as clothing and automobile.
Relatively Inelastic Demand (Ed<1)
Inelastic demand is a condition in which a large percentage change in price will lead to a small percentage change in quantity demanded. Percentage change in quantity demanded is smaller than percentage change in price (%Qd<%∆P). For example, when the price of petrol increases 10%, it will only lead to a slight decrease of 2% in quantity demanded. This happens when there are low substitutes in the marketplace, and the good is an essential commodity. Thus even the prices go up, we cannot reduce consumption by a lot.
Unitary Elastic Demand (Ed=1)
Unitary Elastic Demand is a condition in which a percentage change in quantity demanded equals to percentage change in price (%∆Qd=%∆P). For example, a 5% increase in the price bring about a 5% decrease in quantity demanded. Demand changes proportionately to a price change. In real-world situations, unitary elasticity almost never takes place.
Perfectly Inelastic Demand (Ed=0 )
Perfectly Inelastic Demand is a condition in which...