The Emergence of a Social Division of Labor - Essay Example

1. The production possibility curve (PPC) or production possibility frontier (PPF) shows the maximum possible output of an economy during a specific period of time, given fixed resources and making full efficiency of available resources. An additional trade-off exists between the reward (i.e. sales) of the produced good and the opportunity cost of that good. A choice is non-improvable if the direct reward is higher than the opportunity cost. There is an equilibrium between these two.The PPC is a very useful diagram as it can be used to demonstrate many economic concepts such as opportunity costs, Pareto efficiency, comparative advantage and the law of increasing costs (Rodda, 2005) Also called the transformation curve, the PPC's concept is used in macroeconomics to show the production possibilities available to a nation or economy and also in microeconomics to show the options open to an individual firm. All points on a production possibilities curve are points of maximum productive efficiency or minimum productive inefficiency: resources are allocated such that it is impossible to increase the output of one commodity without reducing the output of the other. That is, there must be a sacrifice - an opportunity cost - for increasing the production of any good. All resources are used appropriately and as completely as possible-without the situation becoming unsustainable (Wikipedia Website). In economics, countries, firms, and individuals have to make choices as to how to use or allocate their resources. Suppose a farmer has to make a decision on buying feeds. He has two choices BRAND A and BRAND B, which are similar in all aspects and differs only on the label. When the farmer decides to use BRAND A, he cannot use the same resources to buy BRAND B. The choices this farmer face and the opportunity cost of buying one good rather than another can be illustrated using a PPC graph. The graph will be a straight line. In this case, the curve represents efficiency and it shows all of the possible combinations of buying BRAND A and BRAND B, given the available capital that the farmer has. For example, the farmer could buy 50 kilos of BRAND A and 0 kilos of BRAND B, or 50 kilos of BRAND B and 0 kilos of BRAND A. Anything that appears outside the production possibilities curve is considered to be unattainable, unless the farmer obtains additional capital. Let's change the other product to fertilizer. With the increasing cost of fertilizer, the farmer could not afford to buy the feed at exactly the same ratio as buying the same feed, as illustrated in Fig. 1. In this case, the opportunity cost increases towards the extreme origin as illustrated in Fig. 2. If for instance, the farmer obtained a new technology in decreasing his usual usage of the fertilizer but with the same effect. This would mean that he could now increase the capital to be used in buying feeds. Thus, an outward shift will be seen in the PPC as illustrated in Fig. 3. In the study of the PPC, it is also of essence to elaborate on the determinants of supply which often causes the shifts of the supply curve. These are: Technology Factor Prices, Number of Suppliers, Expectations of the Future and the Environmental Conditions. A CHANGE IN QUANTITY SUPPLIED means that only the price has changed and a new quantity is supplied along a constant supply curve. A CHANGE (DECREASE OR INCREASE) IN SUPPLY or a SHIFT IN SUPPLY means that a change in amount supplied occurs because of a change (shift) in the position of the supply curve. This SHIFT IN SUPPLY means that one of the other determinants of supply (technology, resource prices, taxes or subsidies, expectations, and the price of other goods produced) has changed (Sosin, 2005). In Fig. 4, resource prices went up so that less is supplied at each price. This shift could also be called a DECREASE IN SUPPLY. 2. a. Rise of Prices of Wheat When the price of wheat is increased, it also means that the price of bread will increase proportionately, since wheat is a main ingredient of bread. People would find other alternatives to replace bread in their diet because of this rise in price. So, in the demand curve, the quantity demanded for bread will decrease. On the other hand, the supply curve shows an increase in the supply of bread if the price of wheat is increased. The surplus resulted because people will opt to buy other alternatives to bread because of its high price. The supply curve is dependent on the price of the good; the cost of making the good; the supply of alternative goods the producer could make with the same resources (competitive supply); the supply of goods actually produced at the same time (joint supply) and the unexpected events that affect supply. b. Rise in the Price of Butter (D1) and Margarine (D2) Given the prices of butter and margarine increase, since margarine is relatively low priced than butter, more people will now opt for breads that use margarine because it is cheaper than breads that use butter in producing it. The shifts in demand curve are caused by the following factors: change in tastes of consumers, change in population, change in prices of other goods (competition or substitutes). In the supply side, since the butter-based bread is expensive, there will be an excess supply for it. On the other hand, the margarine-based breads will have a limited supply since more people will prefer it because it would be cheaper. The factors that would cause supply curve to shift are the following: Change in prices in input goods (raw materials and labor), change in technology and environmental conditions. C. Rise in prices of rice, pasta and potatoes Since rice, pasta and potatoes are substitutes for bread, these carbohydrate-rich foods serve also as competitors of bread. If there is a rise in the price of substitutes, people would prefer eating bread than buying the expensive substitute. Thus, the demand curve will look like this: In the supply side, there will be a scarcity of bread because all its competitors will have higher price. People will definitely prefer to eat bread than rice, pasta and potatoes. In the lecture note of Dorfmann (2005), defines the elasticity of demand or the (own) price elasticity of demand as the measure of how responsive consumers are to a change in price for a good or service. the price elasticity is defined as E = (% change in quantity)/(% change in price) the price elasticity is always negative (although the book skips the negative sign) if -1 < E < 0, we say demand is inelastic which means quantity demanded doesn't change much as price changes Goods which are inexpensive or necessities tend to have inelastic demand if E Read More