Dhaka University
ঢাকা িবশ্বিবদয্ালয়
Submitted By:
Name: Md. Samiul Haque Shaudho
Roll: 65
Year: 3rd
Session: 2021-22
Batch: 16
Submitted To:
Name: Dr. Muhammad Shahadat Hossain Siddiquee
Course Name: Economic Processes and Institutions
Course Code: 303
Topic: The Central Concepts of Economics
Sub-topic: Production Possibility Frontier (PPF), Supply and Demand
Paper Due Date
30 December, 2024
1. Consider a Production Possibility Frontier (PPF) for Bangladesh economy which produces goods and
services. Explain the following facts and also show how these affect PPF (Use separate demand curve for
separate question):
The Production Possibility Frontier or PPF shows the maximum quantity of goods that can be efficiently produced
by an economy given its technological knowledge and the quantity of available inputs.
So, in a Production Possibility Frontier or PPF, the following are presumed to be fixed:
Inputs of production: Land, Labor and Capital
Technology: Methods and Techniques
i. More availability of inputs for both goods
Ans:
An increase in the availability of inputs such as land, labor and capital will generally enhance the production of
both goods and services. Leading to an outward shift of the Production Possibility Frontier or PPF. From the
below graph, we can illustrate that the Production Possibility Frontier (PPF) would shift outwardly from AB to
A′B′, following an increase in the inputs of production.
Figure 1: PPF shift due to increase of inputs
ii. Technological progress in knowledge
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Ans:
Technological advancements would increase the efficiency of production of both goods and services. Resulting
in an outward shift in the Production Possibility Frontier (PPF). From the below graph, we can exemplify that the
Production Possibility Frontier (PPF) might shift outwardly from AB to A′B′ in an addition of new technology.
Due to increased efficiency, the country could generate more outputs with previous amount of inputs.
Figure 2: PPF shift due to technological progress
iii. Shrinking labor force of the country
Ans:
Labor is considered one of the inputs for production in economy. Shrinking labor force of the country because of
emigration, aging population and declining birth-rates, would reduce the available resources for production.
Prompting an inward shift of the Production Possibility Frontier (PPF) from AB to A′B′ in the below graph,
indicating a decrease in the country’s productive capacity.
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Figure 3: PPF shift due to shrinking labor
iv. Natural disaster that decreases the stock of capital
Ans: Natural disasters that decrease the stock of capital such as machinery and infrastructure would hinder the
production of goods as well as services. Therefore, the Production Possibility Frontier (PPF) could shift inward,
from AB to A′B′ as depicted in the below graph.
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Figure 4: PPF Shift due to natural disasters
v. Increase in the national savings of the country
Ans:
Higher national savings prompts more investments. Consequently, increasing future production capabilities of
goods and services of the country. For this, the Production Possibility Frontier (PPF) could shift outward over
time, owing to improvements of production potentials. This is represented by an outward shift from AB to A′B′
as demonstrated in the below graph.
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Figure 6:Increase in national savings
Figure 5:PPF shift due to increase in national savings
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2. Suppose you are analyzing the onion demand in Bangladesh where it is met from domestic production
and import from the rest of the world.
i. Define the law of demand for Bangladesh’s onion market.
To define the law of demand for Bangladesh’s onion market, we need to identify the variables first.
The DEPENDENT variable is the amount of onion demanded.
The INDEPENDENT variables are:
-The price of onion
-The consumer’s money or income
-The price of substitute goods and complementary goods
- Preferences
Demand Law for Onion
QD,Onion =( POnion, INCOME, PShallots, PREFERENCES)
Here, POnion represents the price of Onion.
INCOME represents purchasing power of consumer.
PShallots represents the price of Shallots, a substitute good.
PREFERENCES represents various factors that influence consumers preferences for onions.
ii. Construct a hypothetical demand schedule for onion.
Ans:
Let’s draw a hypothetical demand schedule for onion.
Price of Onion (BDT/kg) Quantity Demanded (kg/day)
50 1000
60 800
70 600
80 400
90 200
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iii. Draw the demand curve for onion based on your demand schedule.
Ans:
Let’s draw the demand curve for onion based on my demand schedule.
Quantity Demanded (kg/day)
1,200
1,000
800
600
400
200
0
50 60 70 80 90
Based on the provided demand curve, we can make the following observations:
The demand curve is downward sloping.
It illustrates an inverse relationship between the price of the onion and the quantity demanded.
Also, explain the following facts and also show how these affect demand curve for onion (use separate
demand curve for separate question):
iv. Increase in the price of onion
Ans:
According to the law of demand, price and quantity demanded have an inverse relationship. Therefore, when the
price of onions increases, the quantity of onions demanded decreases. This is represented as a movement along
the curve from point P(A,B) to P′(A′,B′), indicating a decrease in the quantity demanded of onions due to the
higher price.
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P′(A′,B′)
P(A,B)
Figure 7:Movement of the demand curve due to increase price of onion
v. Decrease in the preference of onion
Ans:
Preferences refer to the factors that influence the customers to buy a product. A decrease in the preferences for
onions means, at a given price, consumers would be less willing to buy onions than before. This change is
represented as a leftward shift of the demand curve from D1D2-D1′D2′ as shown in the following graph.
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Figure 8:Demand curve shift due to the decrease of preferences
vi. Devaluation of BDT against Dollar
Ans:
A devaluation of BDT against Dollar reduces the purchasing power or income of Bangladeshi consumers.
Consequently, they may spend less on onions, decreasing the quantity of onions demanded for a particular price.
This is illustrated by a leftward shift of the demand curve from D1D2-D1′D2′, as depicted in the following graph.
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Figure 9:Demand curve shift due to BDT devaluation against the Dollar
vii. Decrease in the price of substitute (i.e., Shallots)
Ans:
If we consider shallots, a substitute good for onions, a decrease in their price, would lead consumers to replace
shallots for onions, reducing quantity of onions demanded for a fixed price. This could result in a leftward shift
of the demand curve from D1D2-D1′D2′, as displayed in the following graph.
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Figure 10:Demand curve shift due the decrease of a substitute good(Shallots)
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