1.1.4 Production Possibility Frontiers Flashcards
What is a production possibility frontier
maximum potential output combination of two goods that an economy can achieve when all its resources are fully and efficiently employed
Describe the trend as we move down along the PPF
Good X and Y for Micro
Consumer good and Capital Goods for Macro
as more resources are allocated towards Consumer good (Macro)/Good X (Micro), then the extra output we lose production of Capital Goods/Good Y, gets smaller
Explain the shape of the PPF
because all factor inputs are equally suited to producing different goods and services leading to lower productivity
Initially firms will move worker ( + other factors) towards producing Good X if firms think that the workers will be really good at producing Good X
As output of Good X rises though, firms will have to resort to moving workers to production of Good X, even through they are better to producing Good Y
How does PPF link to economic efficiency
- On the line, above, and below
Any point on the PPF line represents a productively efficient allocation of scarce resources
Points inside the PPF represent an inefficient allocation of resources since it is possible to produce more of one good without sacrificing any other - unemployment of resources
Combinations beyond the PPF are unattainable, because a country/firm increase in factor resources/improvement in technology
What factors have allowed contries to consume beyond their own PPF
Specialisation and Trade
Producing more of both goods would be an improvement in allocative efficiency
How is PPF linked to opportunity cost
reallocating resources from producing one good to producing a different good will involve an opportunity cost
Why will a PPF shift outwards
if firm/economy gains more factors of production or quality of factors of production improves
In macroeconomics this shown Economic growth
What is a straight line PPF an indicator of
perfect substitutability of resources such as labour or capital
Causes of an outward shift on PPF
Higher productivity/ efficiency of factor inputs
Better management of factor inputs
Increase in stock of capital and labour supply
Innovation and invention of new products and resources
Discovery/extraction of new natural resources
Reasons for inwards shifts in PPF
fall in productive potential
1) Natural disasters
2) War and conflict
3) net migration out of country’s
4) Long term fall in productivity
What is resource depletion
decline in the total stock of resources available
This can be from de-population, skills decline, and low rates of investments in new capital
What is resource depreciation
When productivity/efficiency of resources diminishes with age and repeated use when producing good/services
