Micro 1.1.4 Flashcards
What is the PPF?
Production possibility frontier
Used to illustrate maximum output an economy can produce if economy is maximising use of scarce resources
How does PPF relate to factors of production?
Shifts out if productive potential rises e.g new technology, division of labour, labour force increase in size or quality. Also new resources discovered.
What is Pareto efficiency?
When it is impossible to reallocate resources to make one preference criterion better without making another worse
When does PPF swivel
When improved technology/labour only improves one aspect of the economy
What shows opportunity cost in the PPF?
Gradient- change in one product / change in the other
E.g lose 40 units of wheat if making 100 units more of cotton
Opportunity cost is 4/10 unit of wheat per unit of cotton
Why is PPF curved sometimes and straight other time?
Curve shows diminishing returns.
As we add more resources to a good we get less marginal output (the rate at which the output increases by, slows)
Marginal opportunity cost goes up
Straight line means marginal opportunity cost remains constant