Question

• What is the implication of specialization for the Production Possibility Frontier?

• Using supply and demand analysis (one diagram for each part), explain what will be the impact on the price and quantity of ice cream sold.
  • The cost of feeding dairy cows increase dramatically.
  • More and more consumers are purchasing ice cream making machines.
  • The price of chocolate syrup falls.

Answer 1

If an economy specializes in a particular good, then it produces more of it and less of other goods, Opportunity costs across the production possibility frontier decreases. I extreme case the economy produces only the specialized good and the production occurs at the corner of the production possibility frontier.

1) If the cost of feeding dairy cows increase dramatically, the cost of producing ice creams will increase, This will lead to a lower supply of ice creams by the sellers. The supply curve will shift to the left. The quantity of ice cream sold will fall and the price will rise.

2) If more and more consumers purchase machines that make ice creams, they will make more ice creams at home. Therefore, demand for ice creams at the market will decrease and the demand curve will shift to the left. Quantity of ice cream sold will decrease and the price will also fall.

3) If the price of chocolate syrup falls, one of the inputs for ice cream production now becomes less costly. Thus, the supply of ice creams in the market would increase. The price and quantity both will increase.