1.1.4 - production possibility frontiers Flashcards
What is a Production Possibility Frontier (PPF)?
A graphical representation that illustrates the maximum combinations of capital and consumer goods that an economy can produce given its available resources and technology are fully and efficiently employed.
Why does the PPF have a negative slope?
Represents the opportunity cost of switching from producing one good to producing the other
Why is the PPF concave?
Resources are not equally efficient at producing both types of goods and services meaning factor inputs are not perfectly substitutable - law of diminishing returns. It gives no indication of which combination of goods is best and so countries have a choice of what to produce.
What does a point on the PPF curve represent?
The maximum productive potential of the economy, the most that the country can produce.
What are consumption goods?
Goods that are demanded and bought by households and individuals.
What are capital goods?
Goods used to aid the production of other goods.
What does a capital-intensive firm use?
A higher proportion of capital than labour.
What does a labour-intensive firm use?
A higher proportion of labour than capital.
What does movement along the PPF curve indicate?
A change in the combination of goods produced.
What does a shift in the PPF curve indicate?
A change in the productive potential of the economy due to changes in quantity and/or quality of factors of production.
What causes the PPF to shift outward?
PPF shifts outwards when there is an increase in an economy’s potential. It represents economic growth, which allows the economy to produce more of both goods or to improve its production capabilities.
What causes the PPF to shift inward?
PPF shifts inwards when there is a decrease in an economy’s potential. It represents economic decline, as the economy can produce less goods than previously.
What does a straight-line PPF indicate?
Perfect factor substitutability of resources between the two goods as the opportunity cost is constant.
What is productive efficiency?
The economy is producing goods and services at the lowest possible cost, given its existing technology and resources.
When is productive efficiency achieved?
When the economy is operating on the PPF curve.
When is productive efficiency not achieved?
Any points inside the PPF indicates underutilization of resources so productivity efficiency is not reached as resources are wasted
What is allocative efficiency?
The economy is producing a mix of goods and services that best aligns with consumer preferences and social needs.
When is allocative efficiency achieved?
Achieved when the economy is producing at a point on the PPF matching society’s preferences
When is allocative efficiency not achieved?
- Any points inside the PPF means allocative efficiency is not reached as it can produce more of one goods without sacrificing production of another good
- Any points outside the PPF is not feasible, and achieveing such a point would require additional resources or technological advancements
What is dynamic efficiency?
The economy’s ability to grow and expand its production possibilities over time.
When is dynamic efficiency achieved?
Achieved when the PPF curve shifts outwards as more goods and services produced than before with same resources
