How Will The Frontier Be Affected By A Positive Change?

Problem #1: Using either a graph or table (Refer to page 22 for help with graphs and tables) use two goods to construct a production possibilities curve. Clearly explain what a variety of different points on the curve mean. What would make the curve expand or contract? Why is efficiency lost at the extremes, as when substantially more of one good and very little of another is produced?

When a firm wants to determine its optimal level of output using marginal revenue and marginal cost the firm needs these two to be equal. Marginal revenue is a change in the total revenue when one or even more units of output are sold. Marginal cost is the cost associated with producing one or more units. Optimal level of output is the desired level of goods or even service that is produced by a company. When the revenue and the cost become equal then the firm that uses profit maximization to determine the optimal level of output has succeeded.

Throughout this task I will do my best to explain how firms determined to maximize profit do just that. Specifically I will delineate how such firms choose the optimum level of production or output for the goods they produce and how they behave with respect to various elevations of marginal revenue. In my attempt it will be appropriate for me to clarify the definitions of various economic terms in order to assure a proper understanding of my thoughts on this topic, I will provide these definitions throughout.

Elastic demand or “elasticity means the extent to which the quantity demanded changes when there’s a change in the price of a good” (Thinkwell, 2013). A product is considered elastic when the change in price increases the percentage change in quantity demanded. When

Demand may be price inelastic - Demand is not very responsive to changes in price. This means revenue will fall.

i) With regard to elastic demand, the change in quantity demanded due to the price change would increase or be larger.

II. When price falls from 4 pounds to 3 pounds the demand for travel increases to 80,000 units- At the original market price of 4 pounds the demand for travel was 60,000 units generating revenue of 240,000 pounds. When the price is reduced to 3 pounds the resulting demand is 80,000 units and this also generates income of 240,000 pounds. When market price changes and the resulting revenue remains the same it can be said that price elasticity of demand is unitary in

When the elasticity of demand is elastic, the change in quantity will be greater that the change in price. Hence, the total revenue will reduce with increasing prices and increase as prices decrease. However, if the business offers goods or services with inelastic price elasticity of demand, then the change in quantity demanded will be smaller than the change in price. Consequently, the total revenue, which is a product of the two will increase when

The concept of elasticity considers the responsiveness of supply or demand in relation to changes in price of

The own-price elasticity is -1.289, which means that if the price goes up $1, the quantity will go down 1.289, and the revenue will drop.

Elasticity of demand is measured as the percentage change in quantity demand divided by the percentage change in price .

If the demand for the good or services of the company is elastic then the change in quantity demanded would be greater than a change in price. Let’s say the 10 percent decrease in price will cause increase in demand for 20 percent. The effect of this changes is that customers buying more products of this company. They are buying it for lower price but the price decrease outweigh by increasing quantity of the products or services. In this case the company benefits from these changes by raising profits. On the other hand, if company would raise the prices for the product the quantity will decrease so does the profit.

d) Should Brennan stay in business? Will other farms with costs the same as Brennan's enter the milk market? Explain.

When price elasticity of demand is elastic, the coefficient will be greater than one. When a percent price change occurs quantity demanded responds strongly there will be a large change in quantities consumers purchase. There is price sensitive in this scenario. If price elasticity of demanded is inelastic the coefficient will be less than one. When a percent price change occurs quantity demanded does not respond strongly then there is a slight change in quantities consumers will purchase. There a weak price sensitive in this scenario. Lastly, if price elasticity of demanded is unit elastic the coefficient will be equal to one. Whenever there is a percent change in price there is an equally matched percent change in quantity demanded. This scenario is rare.

Average and marginal revenue – the important relationshipsIn our example in the table above, as price per unit falls, demand expands and so too does total revenue, although because the demand curve is downward sloping, the average revenue falls as more units are sold. This causes marginal revenue to decline. Eventually once marginal revenue becomes negative, a further fall in price (e.g. from £220 to £190) causes total revenue to fall.Because the price per unit is declining, total revenue is rising at a decreasing rate and will eventually reach a maximum (see the next paragraph).Elasticity of demand and total revenueWhen a firm faces a perfectly elastic demand curve, then average revenue = marginal revenue (i.e. extra units of output can all be sold at the ruling market price). However, most businesses face a downward sloping demand curve! And because the price per unit must be cut to sell extra units, therefore MR lies below AR. In fact he MR