Micro 2: Factors of Production and the PPF diagram

Question 1

What are the factors of production?

Answer 1

They are the inputs used to produce a good or service in order to produce income. They are land, capital, labour and enterprise.

Question 2

Why do firms (producers of goods and services) invest time and resources into producing a good or service?

Answer 2

In the hope that they will be able to sell or trade that product for profit. This means they get more in return for selling it than they put into it.

Question 3

What are factor payments?

Answer 3

The costs the firms have to pay in order to acquire all of the necessary factors of production.

Question 4

What is capital?

Answer 4

These are physical, man-made resources, such as factory buildings and machinery.

Question 5

What is enterprise?

Answer 5

The person who organises the business and often takes the risk of investing their resources into the act of production. Eg. Bill Gates

Question 6

What is land?

Answer 6

These are naturally occuring resources, such as gold ore, oil, and fish.

Question 7

What is labour?

Answer 7

This is the physical and mental effort of the people who make the goods or services. Eg. cleaners

Question 8

What is capital paid for through?

Answer 8

It’s paid for through interest payments. This is because the firm will initially have to borrow money to pay for tools and equipment. (If the firm isn’t very successful in selling their product then they may struggle to pay this back. This is why the entrepreneur is taking a risk).

Question 9

What is enterprise paid for through?

Answer 9

It’s paid for through profit. This is whatever income the entrepreneur has after paying for everything else. The entrepreneur who invested their resources can then take this for themselves to pay the bills, feed their families and buy clothing etc. The profit must be sufficient to stop the entrepreneur from withdrawing their resources and stopping production or moving into another industry.

Question 10

What is land paid for through?

Answer 10

It’s paid for through rent to the owner of the land.

Question 11

What is labour paid for through?

Answer 11

It’s paid for through wages. Workers need to be paid enough to persuade them to put in their time and effort to help the firm.

Question 12

What does labour intensive mean?

Answer 12

Firms that are labour intensive use more people than machines.

Question 13

What does capital intensive mean?

Answer 13

Firms that are capital intensive use more machines than people.

Question 14

What does land intensive mean?

Answer 14

Industries that are land intensive can especially be those in the primary sector which are extracting raw materials, such as gold ore, crops or coal from the ground.

Question 15

What are economic goods?

Answer 15

These are scarce and so have opportunity cost to being used (wood to make a shack can’t be used to make anything else).

Question 16

What are free goods?

Answer 16

These have no opportunity cost as they are in abundance. You are not likely to find people trading with, paying for or rationing free goods. Eg. fresh air, sunshine, seawater and sand

Question 17

What is economic activity?

Answer 17

The conversion of resources into goods and services.

Question 18

Dave can build one simple wooden shack in one day and can catch on average six fish in a day.
What is the potential production of shacks and fish in a week for Dave?

Answer 18

Fish Shacks
0 7
6 6
12 5
18 4
24 3
30 2
36 1
42 0

Question 19

One square metre of land can produce on average ten potatoes or four cabbages. Glenda is in charge of farming the fifty square metres of land.

Answer 19

Potatoes Cabbages
500 0
450 20
400 40
350 60
300 80
250 100
200 120
150 140
100 160
50 180
0 200

Question 20

What is a production possibility diagram?

Answer 20

A diagram used to illustrate the maximum quantities of two goods that a producer or economy can produce in any combination over a given period of time. They illustrate the total potential output of two different goods that a producer can make and all the various combinations in which the goods can be produced. Also known as production possibility frontier and production possibility curve.

Question 21

What can the curves in PPF diagrams be used to illustrate?

Answer 21

The opportunity cost of decision making. The opportunity cost of increasing production of shacks by two more a week can be illustrated on the diagram as the loss of twelve fish a week. Increasing cabbage production by forty cabbages has an opportunity cost of one hundred potatoes.
(see pg. 12 in booklet for diagrams)

Question 22

What does the dot on the PPF diagram illustrate?

Answer 22

The point at which the firm is actually producing. In the diagram on pg.13 in the booklet, the production possibility curve for a firm producing goods, x and y, illustrates the various levels of output at which a firm or economy can operate. This is because production possibility curves illustrate the maximum quantity of both goods that the person, firm or economy could produce, This does not necessarily mean the firm or economy is actually producing at this level.

Question 23

What is productive efficiency?

Answer 23

A situation in which a producer or economy is making full use of the resources available. Producing any more of one good or service must mean producing less of another good or service. It is impossible to squeeze any more from the factors of production currently available.

Question 24

What does it mean if the dot is below the curve on a PPF diagram?

Answer 24

The person is not being productively efficient and can get more out of the resources but for some reason is failing to do so.

Question 25

What does it mean if the dot is above the curve on a PPF diagram?

Answer 25

The person is producing beyond the capacity, representing over production and it is not sustainable. This can only happen for a short period of time before a number of things may happen, eg. the person becomes too ill or tired to work productively.

Question 26

What happens if a producer discovers more factors of production?

Answer 26

This may lead to increased capacity so the curve will shift outwards. If production of one good becomes more efficient, then we will see the curve extending along one axis but not the other.

Question 27

Why do you think a curved PPF often happens?

Answer 27

The 4 factors of production would become depleted, eg. if a fishing village puts all their resources into catching fish instead of half into catching fish and half into growing vegetables, fish begin to run out, unqualified people have to carry out tasks like catching fish when they’re more qualified to build huts, but all the resources like labour have gone into catching fish.

Question 28

What is the central purpose of economic activity?

Answer 28

Producing goods and services to satisfy needs and wants.

Question 29

What does it mean when the PPF curve shifts outwards?

Answer 29

There has been an increase in the quantity or quality of resources, so the productive potential of the economy increases, and there is economic growth.

Question 30

What does it mean when the PPF has a movement along the curve?

Answer 30

Resources have been allocated differently.

Question 31

What is a trade-off?

Answer 31

Increasing production of one good/service decreases the amount of another

Question 32

What factors cause an outward shift of the PPC?

Answer 32

-technological improvements that lead to increased productivity of capital equipment
-discovery of new resources like oil and gas
-improvements in education and training that lead to a more productive workforce
-changes that lead to an increase in working population, eg. increases in immigration or a raised retirement age

Question 33

What factors cause an inward shift of the PPC?

Answer 33

-natural disasters like floods that devastate productive resources
-wars
-global warming/climate change, which may lead to loss of farmland, rising sea levels and more extreme weather
-a prolonged recession which may lead to permanent loss of productive capacity if businesses close down and/or workers lose skills

Question 34

What is allocative efficiency?

Answer 34

When an economy’s factors of production are used to produce the combination of goods and services that maximises society’s welfare