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Diploma in Business Management 1. Imagine that a country can produce just two things:

goods and services. Assume that over a given period it could produce any of the following combinations: Units of Goods Units of Services 0 80 10 79 20 77 30 74 40 70 50 65 60 58 70 48 80 35 90 19 100 0

1.1 Draw the Countrys Production Possibility Curve

Definition of Production Possibility Curve (PPC): Production possibility curve shows the relationship between productions of two different items. It represents how the producer can manage all the resources by altered the resources from one item (opportunity cost) to produce another items. In PPC, it assume that there is only one market involved while it can only produce two items.

1.2 Assuming that the country is currently producing 40 units of goods and 70 units of services, what is the opportunity cost of producing another 10 units of goods? Graph 1: Countrys Production Possibility Curve

Graph 2: Opportunity Cost of producing 50 units of Goods

From the graph above (Graph 2): 40units of Goods + 10units of Goods= 50units of Goods *when the country producing 50 units of Goods, it producing 65 units of services. Therefore,
*to another 10 units of Goods

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Diploma in Business Management 70units of Services 65units of Services= 5units of

Services As a result when the country is currently producing 40 units of goods and 70 units of services, the opportunity cost of producing another 10 units of goods is 5 units of services. *Remark: Opportunity cost, also known as given up cost. It is the cost of shifting the resources from one item to produce another item.

1.3 Explain how the figures illustrate the principle of increasing opportunity cost.

Graph3: Increasing opportunity cost movements

From the graph 3, figure A indicates that when the country gives up to produce goods (0 units of goods), the full amount of resources can use to produce 80 units of services. Figure B shown that when the country increased the production of goods to 25 units, it had to give up 5 units of services production. The production of services is decreasing 10 units produce another 25 units of goods (total 50units), figure C. In addition, figure D indicates that the opportunity cost increase to 23 units of services to produce further 25 units of goods (total 75 units). Meanwhile, figure E indicates that the country choose to fully utilized all the resources available to produce goods, it able to manufacture 100 units of goods From the graph 3, when the production of goods consistently increased 25units, the opportunity cost increase inconsistently. All the figures fall on the PPC indicate that the country has the ability to fully utilize its available resources efficiency.

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Diploma in Business Management 1.4 Now assume that technical progress leads to a 10%

increase in the output of goods for any given amount of resources. Draw the new production possibility curve. How has the opportunity cost of producing extra units of services altered?

Graph 4: Production Possibility Curve movements

From graph 4, the technical progress leads production possibility curve to a positive movement to right. However, the growth of the production possibility curve only benefits the production of goods but doesnt affect the production of services. Therefore, we can assume that the technical progress maybe the technology improved can only benefit goods. For example: Last time, A labor can produce one burger in an hour. Due to the growth of technology, a burgermaking machine invented. It can produce ten burgers in an hour, however it still need a labor to run the machine. Therefore, the growth of production will only affect the goods and give no effect to services.

2. The weekly demand and supply schedules for t-shirt (in millions) in a free market are as follows: Price(RM) Quantity Demanded Quantity Supplied 8 6 18 7 8 16 6 10 14 5 12 12 4 14 10 3 16 8 2 18 6 1 20 4

2.1 What are the equilibrium price and quantity?

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Graph 5: Demand and Supply Curves in T-shirt Market

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Diploma in Business Management From the graph above, it shows that the equilibrium

price is RM5 while quantity is 12 units for both demand and supply.

2.2 Assume that changes in fashion cause the demand for t-shirt to rise by 4 million at each price. What will be the new equilibrium price and quantity? Has equilibrium quantity risen as much as the rise in demand? Explain why or why not. Plot the data in the table and also new data corresponding to the growth in demand. Price(RM) Quantity Demanded New Quantity Demanded Quantity Supplied 8 6 10 7 8 12 6 10 14 5 12 16 4 14 18 3 16 20 2 18 22 1 20 24

18

16

14

12

10

When the demand for T-shirt rise by 4 million at each price, the new equilibrium price is RM6 and quantity is 14 million units. The new equilibrium price and quantity rose from RM5 and 12 million units. Therefore, the equilibrium quantity doesnt rise as much as the rise in demand. It is because of the quantity of supplied doesnt rise while the quantity of demand rose. When the quantity demanded is more the quantity supplied. It caused a shortage of T-shirt. Therefore, the equilibrium price rises from RM 5 to RM6.

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