4.1.1.5 production possibility diagrams

Question 1

what do production possibility frontiers (PPFs) show?

Answer 1

1) the maximum productive potential of an economy
- using a combination of two goods or services
- when resources are fully and efficiently employed

2) can show the opportunity cost of using the scarce resources
-> can show trade-offs

Question 2

what does a PPF diagram look like?
in example of output of cheese and yoghurts

Answer 2

Question 3

what are the most efficient points of output on a PPF?
in example of cheese and yoghurt

Answer 3

• producing at points A and B are the most efficient combinations of output on the PPF
• producing at B, so more yoghurt than cheese is produced, incurs a opportunity cost of producing more cheese

Question 4

what does the law of diminishing returns state?

Answer 4

that the opportunity cost of producing more yoghurt increases, in terms of the lost units of cheese that could have been produced

Question 5

at what points are resources not used to their full productive potential?

Answer 5

• producing at C or D is inefficient
• there’s potential to use these resources more efficiently, which shift production closer to the curve
• there’s unemployment of resources

Question 6

give me a summary of the points of production on a PPF curve?
(efficiency/attainment)

Answer 6

• only production under and on the PPF is attainable
• production outside of the PPF is not obtainable
• only production on the PPF uses resources efficiently (A and B)
• is inefficient to produce below the PPF (point C)

Question 7

how can economic growth be shown on a PPF?

Answer 7

by an outward shift in the PPF

• from the drive with point A on it, to the curve with point B on it

Question 8

how is a decline in the economy shown?

Answer 8

by an inward shift of the PPF

Question 9

what is the original PPF curve drawn, assuming so?

Answer 9

• a fixed amount of resources are used
• there’s a constant state of technology

Question 10

what does an increase in the quantity or quality of resources do to the PPF curve?

how can it be achieved?

Answer 10

shifts it outwards, so the production potential of the economy increases
and there’s economic growth

• can be achieved with the use of supply side policies

Question 11

moving along is the PPF curve is different to shifting it
how?

Answer 11

• uses the same number and state of resources

eg) shifts production from fewer consumer goods to more capital goods
-> this incurs an opposing cost

eg) shifting the curve outwards uses more resources or resources of greater quality
-> this reduces the opportunity cost of producing either capital or consumer goods, since more goods can be produced overall

Question 12

what are capital goods?

Answer 12

• goods which can be used to produce other goods

like, machinery

Question 13

what are consumer goods?

Answer 13

goods which cannot be used to produce other goods

like clothing

Question 14

all points on the boundary are productively efficient but not all are allocatively efficient

explain this?

Answer 14

all points on the boundary are productively efficient
- this is because resources are being used to their productive potential so it’s efficient

not all are allocatively efficient
- because more of one good cannot be produced without reducing the amount of the other product available

Question 15

what is allocative efficiency?

when would there be an increase in it?

is it shown on a PPF?

Answer 15

when no one can be made better off without making someone else worse off

aka: Pareto efficiency

• if more of both goods can be produced there would be a gain in allocative efficiency
  -> this is because there’s an improvement in welfare
• a PPF only shows potential output, and allocative efficiency is concerned with how goods are distributed in society