1.a) Given the Newland’s production capacity, the PPF (Production Possibility Frontier) for production of bicycles and cars are highlighted in the below diagram;
Table 1: Production Possibility Frontier of cars and bicycles
Source: (Author’s Creation)
b. The PPF curve mainly signifies maximum possible output of the two commodities given the inputs such as resources. It generally assumes that all the inputs are effectively utilized in production (Baumol & Blinder, 2015). Few variables involving technology, laborers impact the resources and thereby it shows that point where PPF lies. The PPF curve indicates two commodities production possibilities given the fixed resources. Furthermore, this PPF curve helps to determine efficiency of producing two goods at same time.
This diagram highlights PPF for the production of bicycles and cars. The point A as well as point B on the curve signifies that resources are allocated efficiently by a particular economy. Point B indicates that if a country starts to manufacture large number of bicycles, then they should divert those resources which are used for producing cars. On the contrary, Point A highlights that if the nation starts to produce huge number of cars, then they should give up some resources for manufacturing bicycles. Moving from the point A to B, the economy will reduce total car production in comparison with rise in total bicycle output. The point Y depicts that the resources are utilized inefficiently, which indicates that the economy is not producing huge number of bicycle and cars even though resources are given (Hall & Lieberman,, 2012).
The assumptions of the PPF are illustrated below:
Properties of the PPF are explained below:
c. The three major possibilities by which the Newland could meet rise in demand are given below:
2. Part 1
The demand for and supply of pizza function are given as under-
QD= 20-2P
Qs= P-1
The equilibrium in the market occurs when the demand curve cuts the supply curve, ie QD=Qs
20-2P=P-1
20+1=P+2P
21=3P
P=21/3=7
At P=7, QD=20-2*7=20-14=6, Qs= 7-1=6. The diagram is shown below:
Figure 2: Market equilibrium before tax
Source: (as created by author)
Now if the government imposes $3 tax per pizza that is purchased, then the demand function will be-
QD= 20-2(P+3)
Qs=P-1
The new market equilibrium is-
QD= Qs
20-2(P+3)=P-1
20-2P-6=P-1
3P=20-6+1
3P=15
P=5
At P=5, Qd= 20-2(5+3)=20-16=4, Qs=5-1=4
Figure 3: Market equilibrium after tax
Source: (Author’s creation)
Figure 4: Deadweight loss generated by tax
Source: (Author’s creation)
Tax incidence portrays distribution of tax obligations that should be covered by both seller as well as buyers (Sloman, Norris & Garrett, 2013). It reveals which buyers and producers will give price of new tax. After imposition of tax, the new equilibrium price is now $7 per pizza. This means that sellers pass the burden to purchasers, who will have to pay $1` more per pizza. Meanwhile, while sellers will attain $2 less per pizza they sell.
Tax generates deadweight loss because it prevents the people from purchasing the product that cost high after imposition of tax than it would be before imposition of tax. Deadweight loss refers to loss of good economically which occurs owing to imposition of tax (Taylor et al., 2014). The deadweight loss generated by tax –
Deadweight loss= ½*(P2-P1)*(Q1-Q2)= 3
Part 2
a)
Figure 5: Impact of equilibrium quantity and price of wheat
Source: (Author’s creation)
The market equilibrium occurs when the demand and supply curve intersects each other (Reisman, 2013). From the above diagram , it can be seen that the equilibrium price is $250 and equilibrium quantity is 1000. The US Farm Bill indicates that domestic price of wheat is set at $300, which is above the equilibrium point. As market price is set above the equilibrium price , the total quantity supplied becomes greater than total quantity demanded. This, it leads to creation of surplus and hence equilibrium price of wheat will decline and equilibrium quantity will increase.
b) The figure below reflects consumer surplus, producer surplus and deadweight loss. The triangle abc is the consumer surplus and cbed is the producer surplus. The triangular section bfg is the deadweight loss.
Figure 6: Consumer surplus, producer surplus and Deadweight loss
Source: (Author’s creation)
c. Consumer surplus relates to welfare measurement in which each person needs to attain from consumption of commodity. It is calculated as –
CS= ½*(base*height)
|
Consumer surplus |
|
||
|
Qd |
Change in price |
||
|
800 |
Pmax |
400 |
|
|
0 |
Pd |
300 |
|
|
CS |
40000 |
Producer surplus is that excess amount which the producers obtain from selling of products in market. It is estimated similar to that of consumer surplus.
| Producer Surplus | |||
| Length | Breadth | ||
| Area of Rectangle | 300 | 800 | |
| 200 | |||
| 80000 | |||
| Area of Triangle | Height | Base | |
| 200 | 800 | ||
| 100 | 0 | ||
| 40000 |
PS= 8000+4000=12000
Deadweight loss is calculated as-
DWL= ½*(P2-P1)*(Q1-Q2)
|
Deadweight loss |
|||
|
Change in price |
Change in Quantity |
||
|
P2 |
200 |
Q0 |
1000 |
|
P1 |
300 |
Q1 |
800 |
|
DWL |
-10000 |
d. The outcome of US farm Bill is not fair owing to occurrence of deadweight loss. As it can be seen from the above situation that surplus occurs in the market, this will create problem for the government as domestic consumption has not risen.
3.a) The coffee production needs a favorable climatic condition. Natural calamities often hamper coffee production and thus lead to deficiency in supply. This is shown in the figure given below:
Figure 7: Impact of bushfires and drought on supply of coffee
Source: (Author’s creation)
This figure shows that equilibrium occurs at point E where demand and supply of coffee shown by SS and DD curve intersects each other. Corresponding to this equilibrium point, the equilibrium price is P and quantity is Q. As natural calamities hampers coffee yield, the supply curve shifts in leftward direction from SS to S1S1. Thus, new equilibrium price occurs at P1 and quantity is Q1.
b. Rise in coffee goods after this natural calamities upward pressure on its demand. Moreover, deficiency in supply of coffee due to these calamities impacts the global market. Rise in demand leads to rise in price as well as quantity in global market. Shortage of supply also increases price but reduces the quantity in the market (Mankiw, 2014). Hence, quantity is thereby ambiguous due to opposing forces. Depending on the situation, there might be three cases. In these three diagrams, DD and SS depicts global demand and supply respectively. The global price is P but the quantity differs based on different situation.
Case 1
Rise in global demand exceeds decline in supply leads to decrease in rise in price and quantity.
Figure 8: Rise in demand exceeds supply crisis
Source; (Author’s creation)
Case 2
Rise in demand is less than decrease in supply which results in decline in increase in rise in price but reduces quantity.
9: Reduction in supply exceeds rise in demand
Source: (Author’s creation)Figure
Case 3
The change in demand and supply is same. This leads to rise in price but quantity remains unchanged.
Figure 10: change in demand and supply is same
Source: (Author’s creation)
c. If trial of specie becomes successful, global supply of coffee tends to increase. The rise in supply also increases demand and hence this leads to rise in equilibrium quantity and price. The three cases are shown below:
Case 1
Figure 11: Supply is greater than demand
Source: (Author’s creation)
Case 2
Demand force is greater than supply force, it leads to increase in price.
Figure 12: Demand is greater than supply force
Source; (Author’s creation)
Case 3
Demand and supply changes in equal magnitude, which in turn keeps price unchanged.
Figure 13: Demand and supply changes in equal force
Source; (Author’s creation)
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