1.1.4 Production possibility frontiers

Question 1

Allocative efficiency

Answer 1

Allocative efficiency occurs when the value that consumers place on a good or service (reflected in the price they are willing and able to pay) equals the cost of the resources used up in production and maximises 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.

Question 2

Concave production possibility frontier

Answer 2

A concave PPF is “bowed outwards”. This means there is a rising marginal opportunity cost as you produce more of one good. This is because there is imperfect factor mobility. E.g. labour/land/capital is more suited towards the production of one good than another.

Question 3

Consumer goods

Answer 3

Goods bought and used by consumers and households. They are the end result of manufacturing.

Question 4

Economic efficiency

Answer 4

Economic efficiency is about making best or optimum use of our scarce resources among competing ends so that economic and social welfare is maximised over time.

Question 5

Economic growth

Answer 5

An increase in the productive potential of a country - shown by an outward shift of the production possibility frontier.

Question 6

Pareto efficiency

Answer 6

In neoclassical economics, an action done in an economy that harms no one and helps at least one person. A situation is Pareto efficient if the only way to make one person better off is to make another person worse off.

Question 7

Production possibility frontier

Answer 7

A boundary that shows the combinations of two or more goods and services that can be produced using all available factor resources efficiently.

Question 8

Productive potential

Answer 8

The amount of output an economy could produce if all of its resources were fully and efficiently employed

Question 9

Trade-off

Answer 9

A trade-off implies that choices have to be made between different objectives of policy for example a trade-off between economic growth and inflation.

Question 10

PPF

Answer 10

An economic model that considers the maximum possible production that a country/firm can generate if it uses all of its factors of production to produce only two goods/services.

Question 11

Dynamic efficiency

Answer 11

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.

Question 12

Productive efficiency

Answer 12

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.

Question 13

Marginal analysis

Answer 13

costs/benefits of the next unit of output

Question 14

Why is a PPF diagram drawn as a curve?

Answer 14

It tends to be drawn as a curve because the first resources switched from capital to consumer goods 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.

Question 15

What does a point on a PPF curve show?

Answer 15

the maximum productive potential of the economy, the most it can produce

Question 16

Law of diminishing returns

Answer 16

If the law of diminishing returns holds true, then the opportunity cost of expanding output of X measured in terms of lost units of Y is increasing.

Question 17

What happens if marginal productivity declines?

Answer 17

If the marginal productivity of resources is declining, then the opportunity cost will increase. We are sacrificing more to get a little extra of something.

Question 18

What happens if the PPF shifts outwards?

Answer 18

If PPF shifts outwards, there has been economic growth due to an increase in the quality or quantity of the factors of production.

Question 19

What happens if the PPF shifts inwards?

Answer 19

If the PPF shifts inwards, there has been economic decline due to a reduction in the quality or quantity of the factors of production.

Question 20

What might cause an outward shift in PPF?

Answer 20

Increase in natural resources
Technological advancements
Human capital development
Investment in capital

Question 21

How can you depict the efficient and inefficient allocation of resources in a PPF diagram?

Answer 21

When producing at point on the PPF (or any other point along the curve), production is efficient. When producing inside the PPF, production is possible but inefficient as it is inside the curve.

Question 22

How can you depict possible and unobtainable resources in a PPF diagram?

Answer 22

Points outside the PPF are unobtainable because it is beyond the PPF, which means we do not have the resources/technology to produce at this level. However, points A and B are inside and on the PPF respectively so are possible.

Question 23

What is the distinction between movements along and shifts in production possibility curves?

Answer 23

Movements along the PPF:
Movements along the curve represent changes in the quantity produced of one good while holding the production of the other constant.
Typically caused by changes in resource allocation
Shifts in the PPF:
Shifts represent changes in the economy’s overall production potential.
Caused by factors like technological progress, increased resources, or improvements in labour productivity.

Question 24

What is the difference between capital and consumer goods?

Answer 24

1. Capital Goods
* Capital goods are goods used to produce other goods and services.
* They include machinery, factories, infrastructure, and technology.
* Investment in capital goods can lead to economic growth.

2. Consumer goods
* Consumer goods are items purchased for personal use and consumption.
* They include clothing, food, electronics, and automobiles.
* Consumption of consumer goods satisfies immediate needs and wants.

Question 25

Why is the distinction between capital and consumer goods important?

Answer 25

Capital goods are essential for long-term economic growth and development. Consumer goods satisfy current consumption desires but do not contribute directly to future growth.

Question 26

Capital productivity

Answer 26

Output per unit of capital employed

Question 27

Labour productivity

Answer 27

Output per worker in a given time period