3)Production Possibility Frontier Flashcards
What does ppf mean
⚫️maximum possible output
➡️of both goods and services
➡️when working at full efficiency
➡️using all spare resources
If a country on the curve produced more capital goods, what will it sacrafice
The production of consumer goods
What is the calculation of opportunity cost in the PPF diagram
Total given up➗total gained
➡️an economy is producing 5000 consumer goods
➡️and 200 capital goods
➡️with all its resources fully used
➡️the economy reduces production of consumer goods to 3000
➡️to increase the production of clothing to 300
⚫️find the opportunity cost
⚫️opportunity costs=total given up➗total gained
➡️total given up
➡️5000-3000=2000
➡️total gained
➡️3000-2000=1000
⚫️opportunity cost= 2000➗1000=2
➡️2 units of consumer goods have been given up
➡️for 1 extra unit of capital goods produced
➡️2:1
Why is the PPF bowed outwards
⚫️has decreasing opportunity costs
➡️each country is better at one industry than another
When is the PPF a straight line
⚫️when opportunity cost is constant
➡️resources equally good at producing both goods
Why does PPF move
⚫️if there is an increase
➡️of quantity or quality of FOP
What will happen if the FOP increases
⚫️PPF shift to the right
➡️increase in production possibility of the country
➡️increase in potential output
How could the PPF shift to the right
⚫️investment in capital goods
⚫️immigration extra labour
⚫️discovery of raw material
⚫️better machines
➡️increases labour and capital productivity
⚫️education
➡️increase labour productivity
Why would investment in capital goods shift the PPF right in the long run
⚫️capital goods ➡️required to make ➡️consumer and other capital goods ➡️means more can be produced of all other goods in future ➡️curve will shift right ➡️to show increase of potential output
Why is the PPF downward sloping
⚫️producing more of one good
➡️involves producing less of another good
If we want to produce more consumer goods in the future, what do we have to do
Produce less consumer goods today, and more capital
Give An example of an economy which invests hugely
⚫️china
➡️invests hugely in capital goods
➡️in the last 20-30 years
