1.1.4 Production Possibility Frontiers

Question 1

Define Possibility Production Curve (PPF)

Answer 1

A PPF illustrates the maximum potential output of an economy when all resources are fully employed

Question 2

Define Capital Goods

Answer 2

Those required to produce other goods – Both Capital and Consumer Goods

Examples

• Machinery
• Factory Building

Question 3

Define Consumer Goods

Answer 3

Those that give satisfaction (or utility) to consumers

Examples

• Smartphones
• Cars

Question 4

What do the Points on the PPF Curve indicate?

Answer 4

The maximum productive potential of an economy and that resources are being used efficiently

Question 5

What do the Points inside the PPF Curve indicate?

Answer 5

There are Unemployed Resources in the economy

or

Resources are not being allocated efficiently

Question 6

Obtainable Products

Answer 6

Points inside or on the PPF curve

Question 7

Unobtainable Products

Answer 7

Points on the right/outside the PPF curve

Only become obtainable when there is economic growth

Question 8

What is Marginal Analysis

Answer 8

Is concerned with the impact of additions to or subtractions from the current situation. The rational decision-maker will only decide on an option if the marginal benefit exceeds the marginal cost

Question 9

Marginal analysis (Opportunity Cost)

Answer 9

• Marginal increases in the output of capital goods means that some consumer goods must be sacrificed (the Opportunity Cost)

Question 10

What is Economic Growth?

Answer 10

Refers to an increase in the productive capacity of the economy indicating an increase in real output

Question 11

What is Economic Decline?

Answer 11

Refers to a decrease in the productive capacity of the economy indicating a decrease in real output

Question 12

What are the factors causing an OUTWARD shift in the PPF?

Answer 12

• Discovery of new natural resources (oil)
• Development of new methods of production which increases productivity
• Advances in technology
• Improvements in education and training which increases the productivity of the workforce
• Factors which lead to an increase in the size of workforce, e.g. immigration, an increase in the retirement age, better childcare enabling more women to join the workforce

Question 13

What are the factors causing an INWARD shift in the PPF?

Answer 13

• Natural disasters (earthquakes, floods) which cause a destruction of productive capacity
• Depletion of natural resources
• Factors causing a reduction in the size of the workforce, e.g. emigration, an increase in number of years spent in compulsory education
• A deep recession that results in a loss of productive capacity with factories closing down permenantly