Price and Quantity Demanded of Commodity †MyAssignmenthelp.com

Question: Discuss about the Price and Quantity Demanded of Commodity. Answer: Introduction: The Production Possibility Frontier represent maximum possible output using all the available resources in a nation. Any point on the frontier indicates efficient point of production. Any point inside the frontier shows inefficient production operation while points outside the PPF represents production choice that are not feasible (Rader, 2014). When a country is operating on the PPF, then increasing production of one good must involve decreasing production of some other. The main assumption of PPF are the following The first assumption that using all the resources the country can produce only two goods The resources between the two industries are not perfectly substitutable. The inter-industry transfer of resources thus leads to inefficiency in production (Cowen Tabarrok, 2015). While drawing PPF the technology is assumed to be at a constant level. Two main features of PPF are it is negatively sloped and is concave to the origin. On the PPF increase, production of one good involves sacrifice of output of some other goods. This makes PPF slopes downward. Resources are not perfect substitute (Nicholson Snyder, 2014). Hence, when resources from one industry are shifted to some other industry the inefficiency increases. More the output of one good increases more of some others need to be sacrificed. The increasing opportunity cost make the PPF bowed outward or concave in shape. District D has demand for 3,000 Schmeckt Gut 2.0 and 18,000 Schmekt gut Energy Bars. This is a feasible output combination as indicates a point on the production possibility frontier. However, an increased demand for Schmeckt Gut 2.0 to 4000 along with an increased demand for Schmekt Gut Energy Bar to 20,000 is not a feasible output combination. The increased output of any one of the two product means a decreased production of other. This will be achieved when countries, there is an increase production capacity resulting in an output expansion. One way to achieve this is to make technological advancement so that given amount of resources can result in a higher output. The more efficient use of resources helps to overcome the resource constraint. Other way is to explore new resources. Once new stock of resources is explored then both the product can have a greater amount of resources leading to output expansion for both. Finally, adaptation of specialization technique can increase efficiency of resources contributing to a higher output. District D can use any of the three solution to meet the new demand combination Demand for Energy bars: P = 800 2QD Supply for Energy bars: P = 200 + 1QS At equilibrium, Equilibrium Price The equilibrium price is $400 and equilibrium quantity is 200. If price changes by $1, then new price is $401. The demand function is P = 800 2QD Or, 2QD = 800 P Or, QD = (800 P)/2 The supply function is P = 200 + 1Qs Or, Qs = P -200 Therefore, at price $401, The law of demand suggest that an inverse relation exists between price and quantity demanded of a commodity (Mochrie, 2015). That is, all other things remaining constant, when price increases then demand decreases and vice-versa. When price was $400, then quantity demanded was 200. As price increases by $1, following law of demand, quantity demanded reduces to 199.5. The law of supply states that, all other things remaining constant when price of a good increases then supply should increase and vice versa (Cowen Tabarrok, 2015). By the virtue of law of supply when price increases from $400 to $401, then supply increases from 200 to 201. Reference list Cowen, T., Tabarrok, A. (2015).Modern Principles of Microeconomics. Palgrave Macmillan. Mochrie, R. (2015).Intermediate microeconomics. Palgrave Macmillan. Nicholson, W., Snyder, C. M. (2014).Intermediate microeconomics and its application. Cengage Learning. Rader, T. (2014).Theory of microeconomics. Academic Press.