1.1.4 Production Possibility Frontiers Flashcards
What do we use PPFs for?
We usually use production possibility frontiers (PPFs) to show the maximum potential output combinations of
two goods that an economy can achieve when all its resources are fully and efficiently employed. We can also
use them to show the maximum potential output combinations of two goods that a firm can achieve, when it uses all of its resources (i.e. “factors of production”) efficiently.
What do macroeconomic and microeconomic PPFs look like?
Why do we draw PPFs as concave to the origin?
This is because when we move down along the PPF, as more resources are allocated towards Consumer Goods (on the macroeconomic version) or Good X (on the microeconomic version), then the extra output as we lose production of Capital Goods/Good Y, gets smaller
Why do we lose production on one good when allocating more to another?
This occurs because not all factor inputs (such as land and labour) are equally suited to producing different
goods and services leading to lower productivity. Initially, firms will move workers (and other factors of
production) towards producing Good X if the firm thinks that the workers will be really good at producing
Good X (i.e. they have the ‘right’ skills for the job). As output of Good X rises, though, firms will have to resort
to moving workers to production of Good X even if they are better suited to producing Good Y.
Explain the points A, B, and C on the PPF.
Any point on the PPF represents a productively efficient allocation of scarce resources – all factors of
production are being used in their most efficient way.
Explain points E, F on the PPF.
Combinations of goods lying inside the PPF happen when there are unemployed resources or when resources
are used inefficiently. This is the case with combinations E and F.
Explain D on the PPF.
Combinations beyond the PPF are unattainable. A country or firm would require an increase in factor
resources, an increase in productivity or an improvement in technology to reach this combination i.e. they would need more factors of production.
What happens when increasing our output of cotton from point A to point B?
If we increase our output of cotton (i.e. moving along the PPF from point A to point B) fewer resources are
available to produce wheat – there is an opportunity cost of 40 tonnes of wheat.
Explain when the PPF will shift outwards.
A PPF will shift outwards if the firm, or economy, gains more factors of production, or the quality of those
factors of production improves (e.g. the economy has the same number of workers, but they have received
more training and education, so are more productive). If we draw a macroeconomic PPF and it shifts outwards,
then we can say that there is economic growth.
Explain what a straight line PPF is
A straight line PPF is an indication of perfect substitutability of resources such as labour or capital – we sometimes make this assumption to make our analysis look a little tidier. In the PPF on the left, the economy has experienced an improvement in the technology available for producing capital goods but not consumer goods – there is growth, but it is not ‘balanced’, as the economy’s PPF moves from A to B. In the PPF on the right, the economy has experienced an increase in the factors of production available to make all types of goods – there is ‘balanced growth’ as the PPF moves from A to C.
Draw a table of the causes of an outward shift and why that would shift the PPF.
When are inwards shifts of a PPF caused?
This is caused by a fall in the productive potential of a country i.e. something that causes a decrease in the
factors of production.
Give reasons as to why inwards shifts are caused
- The damaging effects of severe natural disasters such as a tsunami, floods, persistent drought and
other extreme weather events - The economic damage caused by war and other types of conflict for example in failing states
- Large scale net migration of people out of a country e.g. when there is very high unemployment
- A long-term fall in productivity of labour
What is resource depletion?
This is a decline in the total stock of resources available, for example arising in the long run from the effects
of de-population, climate change and low rates of investment in new capital inputs.
What is resource depreciation?
This is when the productivity / efficiency of resources diminishes with age and also with repeated use when
producing goods and services.
