MicromidIK Essay Example | Topics and Well Written Essays - 1500 words

MicromidIK - Essay Example It shows the relationship between price and the supply of goods in the market. The figure below demonstrates the relationship of price and supply. Increase of the prices of goods in the market, results in an increase of goods supplied. Production possibilities frontier Production possibility frontier is a curve that compares the rate of production of goods. For example, if there are two kinds of goods, guns and butter, and all resources are fully employed while technology remains fixed then the production of more guns would require more resources (capital and labour) moved from production of butter to guns. Absolute advantage Absolute advantage is a term used to denote situation where some countries produce certain goods more efficiently than other countries. The cost of production of goods differs from one country to another. Moreover, the skill and technology utilised in production differs. Therefore, absolute advantage is a term used to explain the ability of a country to produce goods and services more efficiently than other countries. For example, countries that produce products like steel, automotive better than other countries are said to have an absolute advantage. Marginal utility In explaining the term marginal utility, it is important to understand the term utility. Utility is a satisfaction or a gain consumer get after consumption of a commodity. Marginal utility, therefore, explains the extra satisfaction a consumer gets after consuming an extra unit of a commodity. Marginal utility is the additional benefit or satisfaction that consumers derive when they spend additional dollar to an extra unit of a commodity or service. Marginal utility also explains the diminishing utility when consumer buys more of a product or service that they already had. Example, a family with five members will need bread for breakfast where each person’s gets three slices of bread. However, if they decide to take extra bread the satisfaction or Utils from the extra bread diminishes. Inferior goods Inferior goods are differentiated from normal goods by their response to increases in income. Unlike normal goods, the demand for inferior goods decreases as income increases. Consumers of inferior goods prefer buying high priced goods when they can afford them. For example, when incomes are low, consumers travel by bus, but when income increases people buy cars and stop travelling by bus. Therefore, bus riding decline as incomes increases. Perfectly elastic demand Elasticity of demand is the responsiveness of changes in demand as a result of factors that affect the demand for goods and service. Therefore, perfectly elastic demand is a where a small change in the affecting factor (price) causes a high or extreme response of demand. Perfectly elastic demand curve has a horizontal curve with a slope equal to zero. In the above diagram, the demand of goods is zero, and above the price of $20 while it is infinite at a price below $20. Producer surplus Pr oducer surplus is the difference between what a producer is able to supply to the market and the actual demand that the market offer under a particular price and time. The situation where the producers are unable to satisfy the demand in the market defines producer’s surplus. Producer of goods and services face the dilemma of what they are willing and able to supply in the market and the actual amount of the price they get. This difference is referred to as the producer’