Kognity Ch. 0.1.3 - Production Possibility Frontier Flashcards
What is the production possibility frontier?
The production possibility frontier is the curve that shows the maximum combination of goods a country can produce in a specific period of time, using all of its resources and the available technology in the most efficient way.
Any point ON the PPF shows…
maximum potential output (economic efficiency).
No resources are being unemployed.
What is economic efficiency?
Economic efficiency is the situation in which a country cannot increase the production of one good without decreasing the production of another good.
Explain the situations when a point is under, on and beyond the PPF.
When a point is under the PPF, resources are being inefficiently used.
When a point is on the PPF, resources are being efficiently used. No country is actually producing on its PPF, as there are always resources somewhere at any point in time that are being unemployed.
When a point is beyond the PPF, it indicates an impossible situation beyond maximum potential output.
What is the difference between actual growth and potential growth?
Actual growth is when a country increases its production of both good X and good Y, moving towards the PPF.
Potential growth is when, due to a change in the economy, the PPF shifts outwards to indicate an increase in maximum potential output.
What factors can cause the potential output of a country to increase?
An increase in the quantity of factors of production.
An increase in the quality of factors of production.
An improvement in technology.
What is the difference between a capital good and a consumer good?
A capital good (which is also a factor of production) is used to produce a consumer good.
e.g. tractors (capital good) are used to farm land from which carrots (consumer good) will be farmed and sold to consumers
