Please answer today's Economics questions:
a) How can the PPF curve be used to show opportunity cost?
b) Which one of the following is most likely to shift the demand curve for laptops to the right?
decrease in the tax on laptops
an decrease in incomes
an increase in the price of tablets
a subsidy granted to the producers of laptops
c) What is meant by a capital good?
Today's challenge is based around microeconomics; in particular we are focusing on markets.
The answers are displayed below. Please try to answer the questions first without looking at the answers! Feel free to comment below or ask questions.
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ANSWERS
a) The PPF curve shows all possible output combinations in an economy. We imagine that a firm is faced with producing two goods, Good A and Good B. When the firm is maximising its output, its produces on the PPF curve. At this point, if the firm wants to produce more of Good B, it must give up producing some units of Good A. This is because there is no extra free capacity for the firm to use. The firm is already at maximum capacity and so it faces a choice of giving up Good A to produce more Good B. What you give up is called the "opportunity cost". The definition for this is "the next best alternative foregone".
The opportunity cost is only faced when producing on the PPF curve. If the producer is currently inside the PPF, it means that the producer has free capacity to use. Therefore, it can produce more Good A and more Good B. (Basically, there is no opportunity cost inside the PPF)
b) The answer is number 3: an increase in the price of tablets. You could say that a tablet is a substitute good for laptops. They have a very similar use in practice and can do very similar things. Therefore, if tablets suddenly increase in price, then (ceteris paribus) it is very likely that the demand for laptops will increase because tablets are more expensive.
c) A capital good is a good that used by a firm to produce its output. Put it simply: a capital good is used to make a consumer good. An example of a capital good is a drill. It is used by car manufacturer when making a car. The car is the good that the consumer buys and the drill is used to make the car. Another example of a capital good is a computer. Computers are used by businesses when they produce goods and services for their customers.
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