1.2 PPC, Opportunity Cost & Circular Flow Diagram

Question 1

Production Possibilities Curve

Answer 1

…illustrates the maximum possible output for two products when there are limited resources.

Question 2

Why are PPCs curved?

Answer 2

Because of the law of increasing costs (increasing opportunity costs).
As we change more resources into the production of one good, the opportunitity cost for each additional unit produced increases at an increasing rate.
Why?
Because we are trying to channel resources into producing goods for which they are ill suited to the task.

Question 3

Allocative Efficiency

Answer 3

Resources are allocated into their best possible use (i.e. what consumers want)

Question 4

Productive Efficiency

Answer 4

Firms produce at the least cost method of production.