PPFs, market equilibrium, elasticity

PPF (PPC)

shows the maximum quantity of two goods or services a firm can produce using all their factors of production

the law of increasing opportunity cost

the more good X is produced, the more good Y needs to be given up

points on the curve

1. any point on the curve is productively efficient

2. any point inside the curve is productively inefficient

3. any point beyond the curve is unattainable

ways to increase production

1. utilise its unemployed factors of production

2. reallocating its factors of production

3. increase the quantity or quality of its factors of production

utilising unemployed factors of production

using all workers, capital or land

reallocating factors of production

a firm can increase production of good X by reallocating its FOP away from good Y and towards good X

increasing the quantity and/or quality of factors

a firm can increase the quantity and/or quality of its factors to increase production of both goods shifting the PPF outwards

supply curve

as quantity increases, due to the law of diminishing marginal returns, costs of production will increase whereby firms require a higher price to cover their costs and make higher profits

at lower prices, firms will only produce the quantity whereby the costs of production will be covered by the price charged

allocative effieciency

where society surplus (the sum of consumer and producer surplus) is maximised

this occurs where demand=supply

assumptions in a free market

1. perfect information for both consumers and producers

2. competition with no dominant firms

3. no barriers to entry

4. consumers are rational utility maximisers

5. firms are profit maximisers

6. there is perfect mobility of factors of production

price elasticity of demand

measures the responsiveness of quantity demanded due to a change in price

determinants of PED

1. the number of close substitutes

2. the percentage of income

3. luxury or necessity

4. addictive nature

5. time period

price elasticity of supply

measures the responsiveness of quantity supplied due to a change in price

determinants of PES

1. production lag

2. level of stocks

3. level of spare capacity

4. sustainability of factors of production

5. time

business significance of PES

it is in the best interest of firms to keep supply as price elastic as possible

when demand and thus the price increases, firms can respond by increasing their output to maximise profits

when demand and thus the price falls, firms can respond by decreasing their output to minimise losses

ways to increase PES

1. shorten the length of the production lag

2. increase level of stocks

3. increase spare capacity

4. increase the sustainability of FOP

shortening the length of the production lag

invest in better quality machinery, increase the no. of workers, increase productivity

increasing the level of stock

investing in a new warehouse or increasing the size of existing storage facilities

increase spare capacity

invest in a new factory or office space

increase the sustainability of factors of production

buying machinery that is multi-purpose or that can be upgraded to aid with production of multiple goods and services

cross elasticity of demand

measures the responsiveness of quantity demanded of good A to a change in price of good B

business significance of XED

if a firm is selling two goods that are complementary in nature then a firm should reduce the price of good A and increase the price of good B to increase total revenue

significance of XED pt 2

if a firm is selling a good with a strong substitute, the firm could reduce its price to increase total revenue

but the rival firm could also reduce their price, leading to a price war

income elasticity of demand

measures the responsiveness of quantity demanded due to a change in income

business significance of YED

YED can provide firms crucial information regarding the relationship of demand for the goods they are producing and income (whether they are normal or inferior goods)

they can prepare for booms and recessions