Question

Explain in detail

1. What is the difference between quantity demanded and demand? Explain the factors that change the demand.

2. What is the relationship between the bowed out shape of the production possibilities frontier and the increasing opportunity cost of a good as more of it is produced?

Answer 1

1. Demand is an important concept in economics. Demand plays a vital role in the theories in economics. Demand and quantity demanded to seem the same when heard but in economics they mean different. Demand for a good comprises of three components which are the desire to buy that commodity, capability to buy the commodity and intention to buy the commodity at present. This can be explained with the help of an example. Suppose you want to buy a car, i.e. desire to buy a car. The car is of $ 15,000 and you are capable of buying it i.e. you have that much money. It will only be called demand for that car if you have the intention to buy the car immediately. Thus in economics, demand for a commodity is desire, capability or money and intention to buy a commodity.

Quantity demanded is the amount of commodity which is demanded by the consumer. It means the quantitative number of a good which is demanded by the consumer. This is the difference between demand and quantity demanded.

In the law of demand, the theory refers to the quantity demanded. It states that there is an inverse relationship between price and quantity demanded of a commodity other things remaining constant.

Qx= f ( Px, Py, Y, T, W, H.....)

Where Qx= quantity demanded of good x

Px= price of good x

Py= price of related goods

Y= income of the consumer

T= taste of the consumer

W= weather

H= habits of the consumer

It shows the functional relationship between quantity demanded and other factors. The relationship between these factors and quantity demanded can be inverse or direct in nature. There are several other factors also which change the demand other than mentioned in the above functional relationship. They can be an advertisement, the number of consumers, market, consumer's expenditure with respect to their future planning, etc.

1. Price - There is an inverse relationship between price and quantity demanded. If price increases, the consumer decreases the quantity of the commodity as their income is fixed.

2. Price of related goods means substitute goods and complementary goods. Substitute goods are goods which can be substituted by the other good. Eg. tea can be replaced by coffee. Complementary goods are the pair of goods which cannot be used separately. Eg. car and petrol, pen and ink. Therefore when the price of tea increases people shift to coffee in case of substitute goods and when the price of petrol increases, it affects the demand for cars run by petrol.

3. There is a direct relationship between the income of the consumer and the quantity demanded. When income increases, the quantity demanded by the consumer also increases and vice-versa.

4. Consumers have different tastes and they buy any quantity of goods according to their tastes. Therefore quantity demanded changes with change in taste.

5. Certain goods are demanded according to the weather. For e.g. raincoat is in demand in the rainy season, people demand woollen clothes in winter.

6. Habits make consumers helpless to buy the commodity to which they are addicted to.

7. Fashion is one of the factors which changes the demand as everyone wants to be trendy.

8. Necessary goods such as medicine also change the quantity demanded and remain unaffected even if the prices increase.

Similarly, there are various such factors known and unknown which changes the quantity demanded of goods by the consumer.

2. Production possibility curve or frontier is concave to the origin. PPC shows the combination of two goods which can be produced with full and efficient utilization of the resources. The PPC is concave or bowed shaped because of increasing opportunity cost. This can be further explained by the following attachments:

Opportunity cost can be decreasing, constant or increasing. As opportunity cost is the slope of the PPC curve, it changes its shape accordingly. In this case, the increasing opportunity cost works in which the amount of Y good forgone increases for the production of an additional amount of good X. This means that to produce one additional unit of good x, the amount of good y forgone increases each time. Thus the slope of PPC becomes positive as the change in y good due to one additional change in x good is increasing. This is why the PPC is bowed out in shape and Marginal rate of transformation which is the slope of PPC is increasing. It is shown graphically below in the attachment with a hypothetical example:

And at E change in Y is 11 which is obtained by the difference in 26 and 15 as per the diagram. Thus the values of Change in Y increases with an additional increase in good x and therefore the PPC or Production possibility frontier is concave to the origin or is bowed out in shape.

Hope this helps.