1.1.4 - the PPF

Question 1

What is a PPF?

Answer 1

A production possibility frontier. A model that demonstrates the maximum amount of good and services an economy can produce when all existing FOPs are fully employed.

Question 2

What are the assumptions of the PPF?

Answer 2

• Optimal/efficient deployment of all available FOPs
• Static analysis, it represents a fixed point in time with a set quantity and quality of FOPs
• It assumes the economy can only produce 2 different goods/services (for simplicity)

Question 3

How can you calculate opportunity cost?

Answer 3

loss divided by gain. It measures the economic cost of reallocating scarce factor inputs between competing uses in terms of the next best alternative forgone.

Question 4

What does a point on the boundary of the PPF represent?

Answer 4

This indicates the maximum possible combinations of x and y due to full employment of resources, any point here is efficient.

Question 5

What do movements along the boundary of the PPF mean?

Answer 5

These movements incur an opportunity cost since no more of x can be produced without diverting FOPs away from y and vice versa.

Question 6

What do points inside the PPF mean?

Answer 6

This represents a sub-optimal use of resources, FOPs are underemployed and this is inefficient. More of x and y can be produced by utilising FOPs more optimally without incurring opportunity cost.

Question 7

What do points outside of the PPF represent?

Answer 7

This is impossible, this combination of x and y is beyond the productive capacity of the economy. The quality and quantity of resources here is unattainable.

Question 8

What are linear shifts in the PPF?

Answer 8

They represent a change in the quality or quantity of FOPs, this alters the productive capacity of the economy by either economic expansion or contraction.

Question 9

What are non-linear shifts in the PPF?

Answer 9

A non-parallel shift (pivot or tilt). The change occurring has non-uniform impacts on productivity. eg. the ability to produce y may increase but not x due to improved capital quantity or quality.

Question 10

What is the difference between short-run and long-run economic growth?

Answer 10

Short run - economy becomes more efficient, reduced underemployment within the boundary.
Long run - increased quantity and quality of FOPs , more capacity to produce these goods. The boundary of the PPF is expanded.