Lecture 2: Production Possibilities Frontier

Question 1

What does the Production Possibility Curve show?

Answer 1

What it shows: the maximum combinations of two goods an economy can produce with its existing resources and technology; an economy can produce at points on or inside its PPC but points outside the curve are unattainable

Question 2

What points represent full employment?

Answer 2

full employment: points inside the PPC are inefficient and represent large scale unemployment because the economy could produce more of both goods while points on the PPC are efficient and consistent with full-employment of resources

Question 3

Production Possibility Curve shape

Answer 3

Shape: the PPC is concave or bowed out away from the origin because of increasing opportunity costs resulting from specialized resources (resources are not equally suited to producing all products)

Question 4

Production Possibility Curve shifts

Answer 4

Shifts: the PPC will shift outwards reflecting an increased capability to produce goods and services when (1) there are increases in the quantity or quality of resources or (2) if there is technological improvement