Explain why the shape of the production possibility frontier is bow-shaped
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Question Two
The Law of demand states that ‘there is a negative relationship between the price of a good and the quantity demanded’ ceteris paribus!
Explain the meaning of this statement. Give practical examples.
How does the Law of supply differ from the law of demand?
Explain, using practical examples any two (2) exceptions to the law of demand.
The shape of the production possibility frontier (PPF) is bow-shaped because of the principle of opportunity cost. As an economy produces more of one good, it must give up some of another good that it could have produced instead. At the extremes, when an economy is only producing one of the two goods, the opportunity cost of producing more of that good increases as resources that are better suited for producing the other good are used instead. This leads to the bow shape of the PPF as it illustrates the trade-offs that an economy faces when deciding how to allocate its resources.
The Law of demand states that there is a negative relationship between the price of a good and the quantity demanded, ceteris paribus. This means that as the price of a good increases, the quantity demanded of that good decreases, and vice versa. This relationship holds true when all other factors that could affect demand are held constant.
Practical examples of the Law of demand can be seen in everyday life. For example, when the price of a popular smartphone model decreases, more consumers will be willing and able to purchase it. Conversely, if the price of a product like gasoline increases, consumers may choose to drive less and seek out alternative modes of transportation.
The Law of supply, on the other hand, states that there is a positive relationship between the price of a good and the quantity supplied, ceteris paribus. This means that as the price of a good increases, producers are willing to supply more of that good to the market.
Exceptions to the Law of demand include goods that have Veblen goods, Giffen goods, or goods with speculative demand. Veblen goods are luxury goods that have higher demand as their price increases because consumers perceive them as a status symbol. Giffen goods are inferior goods with no close substitutes for which demand actually increases when the price increases due to income effects. Lastly, goods with speculative demand experience higher demand as their price increases because consumers expect the price to continue rising in the future.