1.1.5 Production Possibility Frontiers (PPF) Flashcards
What is a PPF?
A curve which shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed.
Why are PPFs curved?
Opportunity cost is not constant.
It is not constant because equipment gets less suitable/efficient at making the other product. This is the law of increasing opportunity cost. The opportunity cost of a good increases as we consume more of it.
A straight line PPF indicates that the two goods use identical factors of production.
Potential growth
Where maximum possible output increase because of investment (e.g. increased resources or better technology)
Actual growth
Where the amount of output produced increases because existing factors are being used more efficiently.
Capital goods
Goods used in the production of other goods. e.g. roads or equipment.
Consumer goods
Goods and services that are used by people to satisfy its wants and needs.
Typical labels used on a macro PPF
Consumer goods and capital goods
Why do we not want 100% capital goods?
It threatens current consumption.
Why do we not want 100% consumer goods?
It threatens future consumption.
What do points A, B, C, D, E and F show?
Points A, B, C, D show the economy is operating where all the resources are being used as efficiently as possible.
Point E lies outside the PPF so isn’t achievable using the current level of resources in the economy. To meet point E, the economy would have the expand (or the factors of production would have to increase).
Point F lies inside the PPF, which means the economy is productively inefficient. With the current level of resources, you could increase output if the resources were used more efficiently.
PPFs and efficiency
All points along the PPF curve are productively efficient - because all resources are used as efficiently as possible to produce the maximum possible ouput.
However, not all points on the PPF are allocatively efficient because not all points will reflect the production of goods that people want or need. E.g. if all resources are used to produce vehicles, it might not match society’s need for houses.
Movements along a PPF curve
When a point on the PPF curve moves (contraction/extension).
Shifts along a PPF curve
When the whole PPF curve moves (expansion/shrinking).
How is economic growth shown on the PPF?
There is an outwards shift in the PPF.
Why might an outwards shift in the PPF occur?
Economic growth
For example:
- Increased resources (e.g. an increase in the total number of workers) would mean the total possible output of that economy would also increase – so the PPF shifts outwards. This extra output could be for either of the goods (or a combination of both).
- Improved technology of improvements to labour (e.g. through training) can also shift the PPF outwards, because it allows more output to be produced using the same resources.
Why might the PPF curve shift inwards?
When fewer total resources are available (e.g. after a natural disaster, recession or war), the opposite of economic growth happens – the PPF shifts inwards, showing that the total possible output has shrunk and there is negative economic growth.
