1.5 Production Possibility Diagrams

Question 1

What do PPFs illustrate?

Answer 1

• Production possibility frontiers depict the maximum productive potential of an economy, using a combination of two goods or services, when resources are fully and efficiently employed.
• PPF curves can show the opportunity cost of using the scarce resources

Question 2

What do the points on the curve show?

Answer 2

• Any point on the curve shows that all resources are being used to their full productive potential.
• Any point inside the curve is inefficient and resources are not used to their full productive potential.
• In other words, there is the unemployment of economic resources.
• Any point outside the curve is unattainable

Question 3

Draw a PPF curve to show the opportunity cost of using scarce resources

Question 4

What else can the PPF depict?

Answer 4

• Economic growth or decline.
• Only production under and on the PPF is attainable.
• Production outside of the PPF is not obtainable.
• However, only production on the PPF uses resources efficiently. It is inefficient to produce below the PPF.

Question 5

How can economic growth be shown on the PPF?
Draw a diagram to show economic growth

Answer 5

• It can be shown by an outward shift in the PPF.

Question 6

How can Economic decline be show on the PPF?
Draw a diagram to show this

Answer 6

• A decline in the economy would be depicted by an inward shift.

Question 7

How is the original PPF curve drawn?

Answer 7

It is drawn assuming:

• A fixed amount of resources are used
• There is a constant state of technology

Question 8

What causes an outward shift of the PPF?

Answer 8

• An increase in the quantity or quality of resources shifts the PPF curve outwards, so the productive potential of the economy increases, and there is economic growth.
• This can be achieved with the use of supply side policies.

Question 9

What does a movement along the PPF indicate?

Answer 9

• Moving along the PPF uses the same number and state of resources, and shifts production from fewer consumer goods to more capital goods, for instance.
• This incurs an opportunity cost.
• Shifting the PPF curve outwards, for example, uses either more resources or resources of a greater quality.
• This reduces the opportunity cost of producing either capital or consumer goods, since more goods can be produced overall.

Question 10

Define capital goods

Answer 10

• Capital goods are goods which can be used to produce other goods, such as machinery.

Question 11

Define consumer goods

Answer 11

• Consumer goods are goods which cannot be used to produce other goods, such as clothing

Question 12

Describe productive efficiency

Answer 12

• All points on the boundary are productively efficient.
• This is because resources are being used to their productive potential so it is efficient.
• However, not all points are allocatively efficient. This is because more of one good cannot be produced without reducing the amount of the other product available.

Question 13

Describe allocative efficiency

Answer 13

• Allocative efficiency is when no one can be made better off without making someone else worse off.
• Another name for this is Pareto efficiency.
• If more of both goods could be produced, there would be a gain in allocative efficiency.
  -This is because there is an improvement in welfare.
• The PPF only shows potential output, and allocative efficiency is concerned with how goods are distributed in society.