Short Answers

Explain the Production Possibilities Curve (PPC). What do the points inside, outside, and on-the-
line represent? When would there be a shift in the PPC curve?
The Production Possibilities curve (PPC) The maximum amount of goods and services (different
combinations of goods and services) that can be produced with the resources available (limited) to the
full extent possible. The resources are used at maximum efficiency.
The PPC graph represents the tradeoff between different goods and services produced by the company
with the resources available to the full extent.









Point inside the curve
The points inside the production possibility curve represents that the resources of the firm are not
utilized to the full possible extent or the resources are not used efficiently. It indicates that more of the
goods and services can be produced with the resources available to the firm. Usually the point is inside
the curve during recession/economy is bad.
Point outside the curve
The point outside the cure represents that with the current resources the firm will not be able to
produce the combination of goods and service at that point. It is impossible to produce at Point A with
the current resources. If the resources increase or becomes efficient the PPC curve shifts and there
might be a possibility.
Points on the curve
Price
of
Good
X
Price of Good Y
In efficient
Impossible
B
A
P
Q
R
S
The points on the curve (Points P, Q, R, S) represent the points that are operating at maximum
efficiency. The firms are making use of the resources efficiently and to the full extent. It represents the
amount of goods A and B that can be produced using the resources to the full extent/efficiency.
There would be a shift in the PPC curve if the firm(nation) makes an improvement in
technology/resources as to be able to produce more or if there is an increase in the natural resources or
the resources available.
What is a price ceiling? What is a price floor? Explain the difference between the two. Explain using a
graph if it helps.
The price at which the quantity demanded is equal to the quantity supplied is called the equilibrium
price and equilibrium quantity
Price ceiling: It is the situation where the price is set below the equilibrium price and is not allowed to
increase. Ex: In California the equilibrium price for rent is $3000 and quantity is 3000 the price is set at
$1500 and is not allowed to increase. In this situation the demand for the product is more and the
supply is less this leads to a shortage in the quantity. The price ceiling is an effective price ceiling only if
its price is set below equilibrium
Price floor: It is the situation where the price is set above the equilibrium price and is not allowed to
reduce. Ex: Usually the government sets the price of agricultural products above the equilibrium price
and does not allow the price to reduce. In this situation the supply of products is more and demand is
less which leads to a surplus in the quantity. The price floor is an effective price floor only if its price is
set above equilibrium
The difference between price ceiling and price floor is that the price ceiling creates a shortage in the
quantities and price floor creates a surplus in the quantities.

What is the law of supply? What are the determinants of supply? What is the difference between a
change in supply and a change in quantity supplied?
Supply: It is defined as the amount of goods/services that producers are willing and able to
produce/sell at different prices during a given period of time when everything else is held constant.
Quantities supplied: The amount of goods and services that producers are willing and able to
produce/sell at a given specified price during a period of time when everything else is held constant.
Supply schedule: The quantities that the producers are able to supply at the given different prices
Supply graph: The supply schedule in a graph form of the supply schedule with price in the Y axis and
quantities in the X axis
Law of supply: The law of supply states that when the price rises/falls during a given period of time
the quantities supplied rises/falls when everything else is held constant.
There are other factors that affect the supply curve (overall supply) called the Determinants of
supply.
The determinants of supply causes the shift in the supply curve and the change (rise/fall) in
price causes the quantity supplied to move along the supply curve.
Price Change Quantity Supplied
Increase in price Moves up the supply curve
Decrease in price Moves down the supply curve

Determinants of supply: There are few factors that cause changes in the supply called the determinants
of supply. When the determinants of supply causes decrease in the supply the curve shifts to the left
and when it causes the increase in supply the curve shifts to the right.
The determinants are: price of supplies (inputs)/resources, the technology and research, expectations of
the suppliers, number of suppliers and prices of alternate goods/services.
1. Price of inputs (resources): when there is an increase in the price of the
resources/supplies/inputs it becomes more expensive to produce a good/service and the supply
decreases so the supply curve shifts to the left. If the price of supplies (resources) decrease
there is more resources to produce the good so the supply increases and the curve shifts to the
right.
2. Technology/Research: If there is an improvement in the technology for a company it causes the
production to be more efficient and the overall supply increases this causes the shift in the
supply curve to the right and when the there is a slack in the technology process the supply
reduces shifting the supply curve to the left.
3. Expectations: As the expectations of the suppliers change the supply curve shifts accordingly. Ex:
if the suppliers expect the price of inputs (resources) to increase in the future they tend to
supply more now.
4. Price of alternate goods/services when the prices of good B produced by a company tends to
increase the quantity supplied for the Good B increases (suppliers move more resources from
Good A to Good B) and the supply of Good A decreases.
5. Number of suppliers: The increase in the number of suppliers shifts the supply curve and
increases the supply of that specified goods/services. Increase in the number of suppliers
increase in the supply and the supply curve shifts to the right.
Determinants Change Change in Supply Shifts in supply curve
Price of resources Rise/falls Decreases/Increases Left/Right
Technology changes Improves/Declines Increases/Decreases Right/Left
Number of suppliers Increase/Decrease Increases/Decreases Right/Left
Alternate
goods/services(price)

Rise/Falls

Decreases/Increases

Left/Right
Expectations Depends Changes accordingly Shifts accordingly

Change in supply occurs when there is a change in the determinants of the good/services supplied
and the change in supply causes the supply curves to shift.
Change in the quantity supplied occurs when the price of the goods/services changes and the
change in quantity supplied is the movement on the supply curve (up/down) depending on the
rise/fall of the price.