Micro 2 - PPFs, Specialisation and functions of money Flashcards
What does PPF stand for?
Production Possibility Frontier
What is a PPF?
Production Possibility Frontiers show the maximum possible output of two goods or services an economy can produce given the existing level of available resources provided resources are used as efficiently as possible
What two categories of products are used when drawing a PPF referring to an economy as a whole?
Capital goods and consumer goods
What are capital goods?
Capital goods are used in the production of other goods
What are consumer goods?
Consumer goods are bought directly by consumers
What do points on a PPF signify?
These points are all achievable without using any extra resources, however they are only achievable when all the available resources are used as efficiently as possible
Explain what moving along the PPF means in terms of the amount of each of the two goods/services produced
As you move along the PPF you are increasing the production of one good but decreasing the production of the other as more resources are allocated to the production of one good and less are allocated to the production of the other
What can be said when sacrificing the production of one good to increase the production of another when moving along a PPF?
There is a trade off between the production of the two goods
What is a trade-off?
A trade-off is when you have to choose between conflicting objectives because you can’t achieve all your objectives at the same time. It involves compromising and aiming to achieve each of your objectives a bit
What are all points on a PPF?
All the points on a PPF are productively efficient because all resources are used as efficiently as possible to produce the maximum possible output.
Although all points on a PPF are productively efficient, what are they not?
Not all the points on a PPF are allocatively efficient because not all points will reflect the production of goods that people want or need
What does it mean when a point lies outside a PPF?
This level of production isn’t achievable using the current level of resources in the economy. To achieve this level of production extra or better resources would be needed
What does it mean when a point lies inside a PPF?
When a point lies inside a PPF it means that making this mix of goods is productively inefficient. With the current level of resources you could be making more of each good
Define opportunity cost
The opportunity cost of a decision is the next best alternative that you give up in making that decision
How do consumers use the concept of opportunity cost?
Consumers use the concept to choose what to spend their income on
How do producers use the concept of opportunity cost?
Producers use the concept to look at the profit forgone by not making an alternative product
How do governments use the concept of opportunity cost?
Governments use the concept to look at the lost value to society from the policies they choose not to implement
What are some of the problems of using the concept of opportunity cost?
- Often not all alternatives are known
- There may be a lack of information on alternatives and their costs
- Some factors don’t have alternative uses
- Some factors can be hard to switch to an alternative use
What do movements along a PPF show?
A reallocation of the same amount of resources
What causes a PPF to shift?
A change in the quality or quantity of the factors of production
What effect would increased resources have on a PPF and why?
It would cause the PPF to shift outwards as it would mean the total possible output of the economy would increase
What does an outward shift of a PPF show?
Economic growth
What effect will fewer total resources have on a PPF and why?
It will cause the PPF to shift inwards as the total possible output has shrunk
What does an inward shift of a PPF show?
Negative Economic Growth
What effect will introducing technology only suited to the production of one good have on a PPF?
It will cause a pivot shift. This means the entire PPF will not shift but it will be stretched
What does a straight line PPF mean?
It assumes that the resources are equally suited to the production of both goods and that the resources can easily be transferred between both goods
What does a straight line PPF mean in terms of opportunity cost?
There is a constant opportunity cost when changing between different levels of output
Define production
Production involves converting inputs into outputs
What can the inputs be during production
The inputs can be anu of the four factors of production: Land, Labour, Capital and Enterprise. The inputs can be tangible which are things you can touch such as raw materials or machines or intangible which are abstract things that can’t be touched like ideas, talent or knowledge
What should the outputs produced during production have?
The outputs produced should have an exchangeable value, they need to be something that can be sold
What is productivity a way of measuring?
Productivity is a way of measuring how efficiently a company or an economy is producing its output.
Define productivity
Productivity is defined as the output per unit of input employed.
So if one company could use the same amount of inputs as another company but produce more stuff their productivity would be greater
Explain productivity in terms of calculation
You can work out an overall level of productivity (involving all four possible inputs) but you can also calculate productivity for any one of the four individual factors of production. Improving the productivity of any one of these separate factors should increase overall productivity
Define labour productivity
Labour productivity is the output per worker or output per hour worked
How do you calculate labour productivity?
- Take the amount of output produced in a particular time
- Divide this by the total number of workers or the total hours worked by all the workers
What can labour productivity be used for?
Labour productivity allows workers to be compared against other workers. For example labour productivity is calculated for whole economies so that the productivity of the different labour forces can be compared
How can labour productivity be improved?
- Better training
- Improved technology
- More experience
How can specialisation improve labour productivity?
Specialisation can improve labour productivity as it involves each worker performing tasks they are good at doing, have practised a lot or have been trained to do so they will produce more than if they did lots of different tasks
What does specialisation lead to?
Specialisation leads to a division of labour
What is the division of labour?
The division of labour is a type of specialisation where production is split into different tasks and specific people are allocated to each task
What are the advantages of specialisation?
1- People can specialise in the thing they are best at, or by doing it they can become better at it. This can lead to better quality and higher quantity of products for the same amount of effort overall leading to higher labour productivity
2- Specialisation can allow firms to achieve economies of scale
3- Specialisation leads to more efficient production which helps to tackle scarcity as more output is produced per unit of input
4- Training costs are reduced
What are the disadvantages of specialisation?
- Workers can end up doing repetitive tasks causing boredom
- Countries can become less self-sufficient
- It can lead to a lack of flexibility as workers may struggle to adapt to other roles due to a lack of skills in other areas
What are the four functions of money?
- A medium of exchange
- A measure of value
- A store of value
- A method of deferred payment
