Answer to Question #296985 in Microeconomics for makgorometsa

Question

1.1 Money is regarded as a factor of production. Do you agree with this statement? Support your answer. [02] 1.2 Use the production possibility frontier (PPF) to illustrate and explain the scarcity, choice and opportunity cost of a farmer who is producing maize and sorghum. Use your own values. [09] 1.3 Draw and explain the diagram showing the three major flows in the economy. [06] 1.4 Show the effects of the following on the demand curve: a) An increase in the number of awareness against consumption of coffee due to its health risk. [02] b) A increase in the price of tea (coffee is the substitute product) [02] c) An increase in the income of consumers for an inferior good. [02] d) A decrease in the price of cornflakes (Milk is a complementary product) [02

Answer 1

1.1 Money cannot be regarded as a factor of production as there are only 4 factors of production (land, labour, capital and entrepreneur) but it is involved as a means of production.

1.2 PPF

Points inside the PPF shows that the firm is not operating at it's full capacity and therefore can produce more. Points outside the PPF are unattainable due to scarcity of resources and therefore the farmer has to make a choice of what to produce. The points along the PPF shows all the combination of goods that can be produced with the available resources and hence presents the opportunity cost of produce one product to the other. This can be shown in the below diagram.

1.3 Circular flow

1.4 Explaining demand of following

a) The demand for coffee will reduce as consumers become conscious of the health hazards associated with consumption of it.

b) Demand for Coffee will increase due to increased price of Tea.

c) Demand for the inferior good will decrease with increase in consumers income.

d) Demand for conflakes will increase and since milk is a compliment also it's demand will increase.