1.2 Production possibility frontiers (PPFs)

Question 1

production possibility frontier (PPF) definition

Answer 1

a simple model which shows how scarce resources in an economy could be divided between the production of two different possible types of output when all resources are employed

Question 2

opportunity cost calculation

Answer 2

opportunity cost (of one unit of good B)
= loss of good A / gain in good B

Question 3

why is opportunity cost relevant in economics (relating to PPFs)

Answer 3

• the condition of scarcity does not allow an economy to produce outside its PPF
  -> the condition of scarcity forces us to make choices about the allocation of resources
  –> these choices involve opportunity cost

Question 4

why is the opportunity cost non-constant on a curved (concave to the origin) PPF?

Answer 4

different resources are more suited to producing different goods = imperfect factor substitutability

Question 5

the opportunity cost of a curved PPF

Answer 5

non-constant, increasing

Question 6

the opportunity cost of a straight PPF

Answer 6

constant

Question 7

why is the opportunity cost of a straight PPF constant?

Answer 7

perfect factor substitutability of resources

Question 8

possible causes for the shift outward or a one-sided shift of a PPF

Answer 8

• long-term economic growth
• changes in productivity

Question 9

factors causing a shift in the PPF

Answer 9

• long-term economic growth
• changes in productivity
• changes in the number of factors of production available

Question 10

what does an increase in capital goods indicate?

Answer 10

economic growth

Question 11

what does an increase in consumer goods indicate?

Answer 11

better living standards; better welfare

Question 12

words to use when interpreting PPFs

Answer 12

• productive potential
• efficient/inefficient allocations of resources
• possible/unobtainable combinations of production