1.1.4 Production possibility frontiers

Question 1

What is a production possibility frontier (PPF)?

Answer 1

The maximum combination of goods and services which can be produced in an economy with existing resources/technology

Question 2

Describe a PPF diagram

Answer 2

• X-axis: output of good A/consumer goods
• Y-axis: output of good B/capital goods
• the curve is in the shape of a quarter circle

Question 3

What does a point on the PPF represent?

Answer 3

All factor inputs are fully and efficiently employed

Question 4

What does a point inside the PPF represent?

Answer 4

Inefficient output, as not all resources are fully employed

Question 5

What does a point outside the PPF represent?

Answer 5

A level of output which could be reached but is not yet attainable (can be attained through economic growth)

Question 6

What does an outward shift of the PPF represent and what are some possible causes (3)?

Answer 6

Economic growth from:
- new/improved technology
- improved efficiency
- more resources/labour

Question 7

What does an inward shift of the PPF represent and what are some possible causes (5)?

Answer 7

Decline in economic growth from:
- recessions
- natural disasters
- pandemics
- wars
- strikes

Question 8

What does a movement along the PPF represent?

Answer 8

Opportunity cost:
Giving up a certain amount of production for good A to produce more of good B [vice versa]

Question 9

What are capital goods?

Answer 9

Goods purchased by firms to produce other goods (e.g. factory machinery, tools, equipment)

Question 10

What are consumer goods?

Answer 10

Goods purchased by households (e.g. food, cars, furniture)