Q.
a) Explain the following terms:
i) Elasticity of demand and supply. (5 marks)
ii) Indifference Curve. (5 marks)
b) Explain the concept of production possibility curve and support your answer with examples and diagrams. (10 marks)
(20 marks, 2011 Q2)
A.
a)
i) Elasticity is a measure of how buyers and suppliers response to changes in the market condition, one major element is price factor. For example, when price of petrol increases, how would demand of petrol be different from when the price was lower? And, similarly, how would price increase affects the supplier of petrol. Are there going to be more suppliers because of better profit?
Elasticity of demand:-
The measurement of quantity of demand in respond to changes in a particular determinant of market forces, e.g. price - Price Elasticity of Demand. Demand is said to be 'elastic' if the quantity of demand responses substantially to changes in price. Conversely, it is 'inelastic' if the quantity of demand does not change or only change slightly with changes in price.
Other types of elasticity of demand: Income Elasticity of Demand, i.e. higher the income, higher the demand.
Elasticity of supply:-
The measurement of quantity supplied in respond to changes in a particular determinant of the market forces, e.g. Price - Price Elasticity of Supply. It is said to be 'elastic' if the quantity supplied responses substantially to changes in price. And, 'inelastic' if it does not.
ii) Indifference curve.
b) Concept of Production Possibilities Curve.
Ref:
Own Account with reference to Mankiw, N. Gregory. 2012. Principles of Economics, South-Western Cengage Learning. Page 90-100.