Part 1
- Draw a hypothetical production possibility frontier involving the above two products (you can name there as Product A and Product B) and identify the efficient and inefficient points of production. Now explain using the concept of opportunity cost and marginal analysis, which business option you will choose and why.
- Now you want to determine the equilibrium price of your chosen product. Explain using a market demand and supply diagram how the demand and supply curves would look like and how you would determine the equilibrium price of your product. List three factors, which would affect the demand curve and list three factors, which would affect the supply curve. What happen if you charge a higher price than the equilibrium price?
- You are contemplating a price cut to boost your sales. Explain using the concept of elasticity how you would go about it. Illustrate the reasoning with a diagram. Would it be good if you were operating in the inelastic part of the demand or the elastic part of the demand curve?
- In order to increase your profit; you are taking a look at your production costs. Explain and illustrate using the concepts learned which costs would be the most important determines of your profit in the short run as well as in the long run. Do you think the nature of the market structure matters for you to operate your business?
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