Question

A shortage of demand in the market will cause the price of a product to increase.

True or False

A point inside the production possibility frontier indicates an economy that is underutilizing resources.

True or False

Answer 1

Answers

A shortage of demand in the market will cause the price of a product to increase.

Answer: False

A shortage of demand in the market will cause the price of a product to decrease. This is illustrated in the following diagram.

In the above diagram, we are measuring the quantity demanded of a good on the horizontal axis, and the price of the good on the vertical axis. 'DD' is the demand curve of the good, and 'SS' is the supply curve of the good.The market clears at point 'e', where quantity demanded equals the quantity supplied.The shortage of demand in the market means, at a given market price, the quantity demanded in the market is less than the quantity supplied in the market.This happens at the price, which is greater than the equilibrium price.In the figure, we see that at price P₁, the quantity demanded for the product is 'Q_d' units, and the quantity supplied of the product is 'Q_s' units, where Q_s is greater than Q_d by the amount 'LM'(LM =Q_s - Q_d). In this case the price of the product must fall to increase the demand for the product and clear the market.

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A point inside the production possibility frontier indicates an economy that is underutilizing resources.

Answer: True

The production possibility frontier shows the maximum possible amount of combination of two goods that can be produced by utilizing all the available resources an economy has. In the above figure, an economy produces two goods, good X, measured on the horizontal axis, and good Y, measured on the vertical axis. The curve 'PPF' is the production possibility frontier curve. If the economy fully utilizes all of its available resources, it can produce at any point on the PPF curve.The position of the point on PPF curve, depends on the requirement of the goods, the economy wants. Any point inside the PPF curve shows that the economy has underutilized or unused resources, i.e., the economy is not producing the maximum possible amount it can produce.This point is shown by point 'T', which lies inside the PPF curve in the above diagram.

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