1.1.5 Production Possibility Frontiers (PPF)

Question 1

What is a PPF?

Answer 1

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.

Question 2

What do micro PPFs show?

Answer 2

• maximum possible production of two specific goods/services
• the various combination of two goods/services that cam be produced with given factors of production

Question 3

What do macro PPFs show?

Answer 3

• maximum possible production of all goods/services
• the various combination of all goods/services that cam be produced with given factors of production

Question 4

What does a concave PPF curve show?

Answer 4

the law of increasing opportunity cost

Question 5

What causes a movement along a PPF curve?

Answer 5

Factors of production are more suitable towards one thing

Question 6

What causes a shift of the PPF curve?

Answer 6

A change in the Quantity or Quality of factors of production

Question 7

What does a linear PPF show?

Answer 7

A constant opportunity cost

Question 8

What a the three types of efficiency?

Answer 8

Productive, Allocative and Pareto

Question 9

Potential growth

Answer 9

Where maximum possible output increase because of investment (e.g. increased resources or better technology)

Question 10

Actual growth

Answer 10

Where the amount of output produced increases because existing factors are being used more efficiently.

Question 11

Capital goods

Answer 11

Goods used in the production of other goods. e.g. roads or equipment.

Question 12

Consumer goods

Answer 12

Goods and services that are used by people to satisfy its wants and needs.

Question 13

Typical labels used on a macro PPF

Answer 13

Consumer goods and capital goods

Question 14

Why do we not want 100% capital goods?

Answer 14

It threatens current consumption.

Question 15

Why do we not want 100% consumer goods?

Answer 15

It threatens future consumption.

Question 16

What do points A, B, C, D, E and F show?

Answer 16

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.

Question 17

PPFs and efficiency

Answer 17

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.

Question 18

Movements along a PPF curve

Answer 18

When a point on the PPF curve moves (contraction/extension).
** A,B,C ** are all movements along ppf curve

Question 19

Shifts along a PPF curve

Answer 19

When the whole PPF curve moves (expansion/shrinking).

Question 20

How is economic growth shown on the PPF?

Answer 20

There is an outwards shift in the PPF.

Question 21

Why might an outwards shift in the PPF occur?

Answer 21

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.

Question 22

Why might the PPF curve shift inwards?

Answer 22

When fewer total resources are available / a reduction in the amount of resources 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.

Question 23

Why Is the ppl curve drawn as been concave

Answer 23

law of diminishing marginal returns, it occurs because not all factor inputs are equally suited to producing items leading to lower productivity