1.1.4 Production possibility frontiers

Question 1

What is a Production Possibility Frontier (PPF)?

Answer 1

A PPF shows all the maximum possible combinations of two goods that a country can produce in a specific period of time with all of its resources fully and efficiently used
- Used to demonstrate economic growth and opportunity cost
- Any point inside the curve suggests resources are not being utilised efficiently (unemployed curve)
- Any point outside the curve, not attainable with the current level of resources (unattainable point)

Question 2

Features of Production Possibility Frontier (scarcity + trade-offs)

Answer 2

• The PPF demonstrates the concept of scarcity, which refers to the limited availability of resources (such as labour, capital, and land) in relation to the unlimited (and often growing) wants and needs of a society.
• The PPF reflects the idea that an economy must make trade-offs when allocating its resources. Producing more of one good necessitates producing less of another. The shape of the PPF highlights the trade-offs required when reallocating resources between the two goods.

Question 3

Features of Production Possibility Frontier (opportunity cost + efficiency)

Answer 3

• The opportunity cost of producing more
  of one good is the amount of the other good that must be given up. The slope of the PPF represents the opportunity cost of switching from producing one good to producing the other.
• Points along the PPF represent an efficient use of resources, where the economy is fully utilising all available resources to produce goods and services. Points inside the PPF are inefficient, indicating that resources are not fully employed.

Question 4

Features of Production Possibility Frontier (constraints and economic growth + assumptions)

Answer 4

• The PPF can shift outward or inward based on changes in the availability of resources, technological advancements, or improvements in productivity. An outward shift of the PPF indicates economic growth.
• The PPF diagram makes several assumptions, such as fixed resources, a given level of technology, and full resource utilisation. These assumptions may not always hold.

Question 5

Why are PPFs curved?

Answer 5

• A PPC is curved when some resources are better at making one type of product than making another as opportunity cost is not constant
• This is called imperfect factor substitutability — this means it is difficult to substitute (transfer) factors from making one product to the other

Question 6

Explain the Concave of the PPF

Answer 6

• Shape of PPF commonly drawn as an arc that is concave to the orgin
• With the law of diminishing returns the opportunity cost of expanding output of X measured in terms of lost units of Y is increasing
• E.g. resources such as land, capital and labour used in producing wheat might not be equally suited to producing beef
• If the marginal productivity of resources is declining then the opportunity cost will increase

Question 7

When will a PPF shift outwards?

Answer 7

• A Production Possibility Frontier (PPF) shifts outward when there is an increase in an economy’s potential to produce goods and services.
• This outward shift represents economic growth, which allows the economy to produce more of both goods or to improve its production capabilities

Question 8

Explaining an outward shift in a PPF

Answer 8

• Increase in Natural Resources: For example, if a country discovers new oil reserves, it can increase its production capacity.
• Technological Advancements: Technological progress allows an economy to produce more output with the same resources or to produce existing output more efficiently.
• Human Capital Development: Better-educated and more skilled workers can increase productivity, leading to the production of more goods and services.
• Investment in Capital: Increased investment in physical capital, such as infrastructure, machinery, and technology, can enhance an economy’s productive capacity and lead to an outward shift of the PPF.

Question 9

When will a PPF shift inwards?

Answer 9

• A PPF shifts inward when there is an decrease in an economy’s potential to produce goods and services
• Inward shift represents economic decline
  e.g. natural disaster, war, decrease in capital stock, decrease in productivity and fall in production

Question 10

PPF and Economic Efficiency

Answer 10

• The Production Possibility Frontier (PPF) diagram is a useful tool in economics to illustrate different types of economic efficiency.
• It helps demonstrate the concept of efficiency in resource allocation and provides insights into how an economy can achieve optimal production levels given its available resources.
• The PPF diagram can highlight three key types of economic efficiency: productive efficiency, allocative efficiency, and dynamic efficiency.

Question 11

PPF and Productive Efficiency

Answer 11

• Productive efficiency occurs when an economy is producing goods and services at the lowest possible cost, given its existing technology and resources.
• On the PPF diagram, productive efficiency is achieved when the economy is operating on the PPF curve. Points on the PPF represent the maximum output attainable with the given inputs, and any point inside the PPF indicates underutilization of resources.
• If the economy operates inside the PPF, it is not reaching productive efficiency because resources are being wasted.

Question 12

PPF and Allocative Efficiency

Answer 12

• Allocative efficiency occurs when an economy is producing a mix of goods and services that best aligns with consumer preferences and social needs.
  It represents the ideal distribution of resources among different goods to maximize overall satisfaction.
• On the PPF diagram, allocative efficiency is achieved when the economy is producing at a point on the PPF that matches society’s preferences.
• If the economy is producing at a point inside the PPF, it is not achieving allocative efficiency because it can’t produce more of one good without sacrificing the production of another good.
• A point outside the PPF, it is not feasible, and achieving such a point would require additional resources or technological advancements.

Question 13

PPF and Dynamic Efficiency

Answer 13

• Dynamic efficiency refers to an economy’s ability to grow and expand its production possibilities over time. This involves shifting the PPF outward through technological advancements, investments, and innovations.
• An outward shift of the PPF indicates that the economy has achieved dynamic efficiency, allowing it to produce more goods and services than before with the same resources.
• This might have been achieved through process innovation such as lean manufacturing used in car-making, or innovation in farming that increases yields of particular crops each year.

Question 14

What are capital goods?

Answer 14

• Goods that are used to make consumer goods and services
• Capital inputs include fixed plant and machinery, hardware, software, new factories and other buildings

Question 15

What are consumer goods and services?

Answer 15

• Goods and services which satisfy our needs and wants directly
• There is a sub-division between:
  1. Consumer durables: Products that provide a steady flow of satisfaction / utility over their working life (e.g. a washing machine or using a smartphone).
  2. Consumer non-durables: Products that are used up in the act of consumption (e.g. drinking a coffee or turning on the heating)
  3. Consumer services: E.g. a hair cut or ticket to a show