Lecture 6 GE: Production Flashcards
Production possibility set
The set of all feasible output bundles
PPF (Production possibilities frontier)
This is the sets outer boundary
What is the ppf slope?
Negative which means when economy is functioning efficiently any increase in production of one good will come at expense of reduction of other good.
What does the MRT measure
How much of one of the goods needs to be given up to produce one more unit of the other good
Increasing opportunity costs to specialisation
producing more of a specific good leads to increasing costs in terms of what must be sacrificed from the
production of other goods.
What is the slope of an isoquant known as?
The marginal rate of technical substitution (MRTS
What must we consider when determining product mix efficiency?
Must consider both technical feasibility and individual preferences
What do relative prices guide?
- Utility maximising decisions of all consumers
- The profit max decisions of all producers
What happens when prod tech displays increasing returns to scale?
There is no competitive equilibrium and theory doesn’t hold
Why does ppf become steeper as we increase production of food 1 and decrease good 2?
Efficient production requires exploitation of comparative advantages
What do we need for second theory to hold
Consumer preferences convex and firms production possibility to be convex
