1.1.4 Production possibility frontiers Flashcards
Production Possibility Frontier PPF
The PPF shows the maximum possible combinations of capital and consumer goods that the economy can produce with its current resources and technology.
- It tends to be drawn as a curve because the first resources switched from capital to consumer good production are resources that are not adding much to capital goods but will be much more productive in the production of consumer goods, and vice versa.
- It gives no indication of which combination of goods is best and so countries have a choice of what to produce: economics is concerned with explaining why they chose this point.
Movements along PPF
A movement along the curve indicates a change in the combination of goods produced: more capital goods are produced and less consumer goods are produced, or vice versa. The same amount of resources are allocated amongst the two goods differently.
Shifts of PPF
A shift of the curve indicates a change in the productive potential of the economy: more consumer and capital goods can be produced or less consumer and capital goods can be produced. There has been a change in the number of resources and/or the technology available to the country and so their potential output has changed.
Capital vs Consumer goods
Goods are split into two types of goods: consumer and capital goods:
1) Consumer goods: goods that are demanded and bought by households and individuals.
2) Capital goods: goods that are produced in order to aid the production of consumer goods in the future.
Some goods can be both consumer and capital goods, for example computers.
PPF synoptic point *
This topic links well with macroeconomics and economic growth: an outward shift of the PPF represents potential growth and an outward shift of the LRAS curve.
(2.5.)
Maximum productive potential of an economy - PPF
Any point on the curve represents the maximum productive potential of the economy, the most that the country can produce.
