Micro 1.1.4 Flashcards

1
Q

What is the PPF?

A

Production possibility frontier

Used to illustrate maximum output an economy can produce if economy is maximising use of scarce resources

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2
Q

How does PPF relate to factors of production?

A

Shifts out if productive potential rises e.g new technology, division of labour, labour force increase in size or quality. Also new resources discovered.

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3
Q

What is Pareto efficiency?

A

When it is impossible to reallocate resources to make one preference criterion better without making another worse

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4
Q

When does PPF swivel

A

When improved technology/labour only improves one aspect of the economy

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5
Q

What shows opportunity cost in the PPF?

A

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

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6
Q

Why is PPF curved sometimes and straight other time?

A

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

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