1.3 Understanding The World by Use of Models

Question 1

What does PPC stand for?

Answer 1

Production possibility curve

Question 2

What is the definition of a ‘model’?

Answer 2

representation of reality in a simplified way

Question 3

What is the PPC?

Answer 3

The PPC Is a diagrammatic representation of the maximum combination of products an economy can produce with it’s fixed amount of resources & technology over a period of time. It shows the productive capacity of an economy over time.

Question 4

What does point C show on this graph?

Answer 4

Point C is to the right of the PPC indicating it is unattainable, as the economy does not have enough resources to produce that combination of goods

Question 5

What does point B show on this graph?

Answer 5

As point B lies to the left (under) the PPC it shows that the economy is inefficient (the resources aren’t fully utilised)

Question 6

What are some of the assumptions of the PPC model?

Answer 6

1. 2 production possibilities (fixed)
2. Scarcity (Fixed and limited amount of FOP’s)
3. Constant technology
4. Efficiency (the model assumes that the FOP’s are fully utilised)

Question 7

What could cause the slope of the PPC to change?

Answer 7

A change in technology or productivity

Question 8

What is the definition of ‘efficiency’?

Answer 8

“All the resources are fully utilised & they are used efficiently (maximum output, no wastage)”

Question 9

What is “Actual growth”?

Answer 9

Actual growth is shown by a movement from 1 point inside the PPC to a point closer to the PPC. Actual growth is caused by a reduction of unemployment of resources and an increase in efficiency in production.

Question 10

What is “Potential growth”?

Answer 10

The country will achieve potential growth if the production capacity of the economy increases from 1 period to the other. (For example, due to an increase in the quantity of production. )

Question 11

How can the potential output of an economy be increased?

Answer 11

• An increase in the quantity of factors of production
• An increase in the quality of factors of production
• An improvement in technology

Question 12

What type of growth is point A to B?

Answer 12

Actual growth, as the economy has moved closer to the PPC

Question 13

What type of growth is point C to D?

Answer 13

Potential growth, as the economy has had a growth in production capacity and the PPC has shifted to the right

Question 14

What do points that are on the PPC show?

Answer 14

They show that the economy is at maximum efficiency

(any point on the curve is allocatively efficient)