4.1.1.5 Production possibility diagrams Flashcards
What does a Production Possibility Frontier (PPF) show?
A PPF shows the maximum productive potential of an economy for two goods or services when resources are fully and efficiently employed.
What does a PPF illustrate about the fundamental economic problem?
A PPF illustrates resource allocation, opportunity cost, trade-offs, unemployment of resources, and economic growth.
What is the opportunity cost shown by a PPF?
The PPF shows the opportunity cost of producing one good over another, as resources are reallocated between the two.
What does it mean to produce at points A and B on a PPF?
Points A and B are productively efficient, meaning resources are fully and efficiently used to produce the maximum possible output of both goods.
What does it mean to produce at point C or D on a PPF?
Points C and D are inefficient, as resources are not fully utilized, leading to unemployment of economic resources.
What does it mean to produce at point E on a PPF?
Point E is unattainable with current resources and technology, as it lies outside the PPF.
What is the law of diminishing returns in the context of a PPF?
The law of diminishing returns states that the opportunity cost of producing more of one good increases as resources are reallocated, resulting in fewer units of the other good being produced.
How does a PPF show economic growth?
Economic growth is shown by an outward shift of the PPF, indicating an increase in the economy’s productive potential due to more or better resources or improved technology.
How does a PPF show economic decline?
Economic decline is shown by an inward shift of the PPF, indicating a reduction in the economy’s productive potential due to fewer or lower-quality resources.
What assumptions are made when drawing a PPF?
A PPF assumes a fixed amount of resources and a constant state of technology.
What is the difference between moving along a PPF and shifting a PPF?
Moving along a PPF: Reallocates resources between two goods, incurring an opportunity cost.
Shifting a PPF: Changes the economy’s productive potential due to more/better resources or improved technology.
What are capital goods?
Capital goods are goods used to produce other goods, such as machinery.
What are consumer goods?
Consumer goods are goods used by individuals, such as clothing, and cannot be used to produce other goods.
What is productive efficiency?
Productive efficiency occurs when resources are used to their full potential, meaning production is on the PPF curve.
What is allocative efficiency?
Allocative efficiency occurs when resources are allocated in a way that maximizes societal welfare, meaning no one can be made better off without making someone else worse off (Pareto efficiency).
Why are all points on the PPF productively efficient but not necessarily allocatively efficient?
All points on the PPF are productively efficient because resources are fully utilized. However, not all points are allocatively efficient because producing more of one good reduces the amount of the other, which may not align with societal preferences.
How can allocative efficiency be improved?
Allocative efficiency can be improved if more of both goods can be produced, increasing overall welfare.
What does the PPF show about potential output and allocative efficiency?
The PPF shows potential output, but allocative efficiency is concerned with how goods are distributed in society to maximize welfare.
What is Pareto efficiency?
Pareto efficiency occurs when no one can be made better off without making someone else worse off, representing optimal resource allocation.
How can supply-side policies affect the PPF?
Supply-side policies (e.g., improving FOP resource quality or quantity) can shift the PPF outward, increasing the economy’s productive potential and reducing opportunity costs.
