1.14 - Production Possibility Frontiers

Question 1

Explain production possibility frontier (PPF)

Answer 1

.curve which shows the maximum potential level of output of an economy

. shows the various possible combinations of two goods/services that can be produced with given factors of production

. the economy cannot produce at any point outside its existing PPF

Question 2

Capital goods

Answer 2

Goods produced in order to aid production of consumer goods

E.g. roads, bridges, machinery

Question 3

Consumer goods

Answer 3

Goods that are demanded and bought by households and individuals. They are for final use and for consumers to consume

E.g. Clothing, food, holiday, DVDs

Question 4

Opportunity Cost Equation

Answer 4

What is sacrificed / what is gained

Question 5

When is there is an outward shift of PPF?

Answer 5

When there is economic growth and production potential of an economy increase

Increase in LRAS

Question 6

When is there an inward shift of PPF?

Answer 6

When production possibility of an economy falls and the production potential of an economy decreases

Decrease in LRAS

Question 7

What can cause an outward shift in PPF?

(Productive Potential and Productive Efficiency increases)

Answer 7

. quantity of resources available increases; for instance there might be an increase in the number of workers in the economy or new factories and offices might be built. Immigration will cause the maximum potential of output in an economy to increase

. increase in the quality of resources; education will make workers more productive whilst technical progress will allow machines and production processes to produce more with the same amount of resources

• Factors that cause LRAS to shift

Question 8

What causes an inward shift in PPF?

(Productive Potential and Productive Efficiency decreases

Answer 8

. Factors that cause a fall in LRAS

. fall in the quality and quantity of the factors of production

Question 9

What may cause production to fall within the boundary?

Answer 9

. High levels of unemployment leads to factories and machines being idle.

. This means that resources are not fully used efficiently so production falls within the boundary

. There will be production inefficiency

. There will also be allocatively inefficiency, as social welfare is not maximised due to underconsumption and underproduction of goods and services in an economy

Question 10

Explain consumption vs investment

Answer 10

. If a company used their money to invest on consumer good, they would be better of in the short run

. If a company used their money on capital goods such as more machinery or offices they would be better off in the long run due to a higher production possibility

Question 11

There’s two types of efficiency on the boundary of the PPF line. Name the two types of efficiency

Answer 11

. Production efficiency

. Allocatively efficient

Question 12

Define productive efficiency

Answer 12

.When production takes place at the lowest cost with a maximum amount of goods being produced. It occurs when a given set of resources produce the maximum number of goods.

. ALL points on the boundary are productively efficient as they show the combination of goods produced at the lowest cost for that combination

. Points inside the PPF curve at NOT productively efficient. They are productively inefficient because factors of production are being unemployed.

Question 13

Define allocatively efficient

Answer 13

. When social welfare is maximised

. NOT ALL points on the boundary are allocatively efficient. This is because not every combination of goods produced will maximise welfare

Question 14

Why is the PPF curve concave?

Answer 14

To illustrate the law of increasing opportunity cost

Question 15

What causes short run economic growth?

(Not shift in PPF curve)

(Increase in production from within the curve to on the curve)

Answer 15

. Utilising its employed factors of production to produce more of goods

E.g. making the unemployed employed

E.g. Using all resources available

Question 16

The PPF Curve show the law of increasing opportunity cost

Define Law of Increasing Opportunity Cost

Answer 16

The law of increasing opportunity costs states that as you increase production of one good, the opportunity cost to produce an additional good will increase.