Question

Consider the market for umbrellas. Show what happens to price and quantity using a

supply and demand diagram AND providing economic intuition. For the diagram, you

can choose from the set of cases presented at the end of the exam.

a)

New innovations make producing umbrellas cheaper

b) A severe drought occurs, not brining any rain for weeks

c) Ponchos – a substitute for umbrellas – become a lot cheaper

2)

Suppose you observe that our society produces goods and services very inefficiently.

Explain why no tradeoffs need occur to produce more of a particular good



ONLY ANSWER #2.

Answer 1

To answer this question we need to understand what ineffective production means, it means that one of four resources (land, labor, capital, and entrepreneurial ability) are being under-utilised. To produce more of one good, the society need not let go off another good rather they should just utilise all resources to the maximum potential. In the first place trade off would occur on the production possibility frontier were all resources are being utilised to there maximum potential and hence to produce more of one good, the society gives up an quantity of the other good.

In this graph the points on the PPP would require a trade off to increase production of one good, whereas the point within the PPP requires more efficient utilisation of resources to increase production of one good and does not need a trade off.