Micro 2 - PPFs, Specialisation and functions of money

Question 1

What does PPF stand for?

Answer 1

Production Possibility Frontier

Question 2

What is a PPF?

Answer 2

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

Question 3

What two categories of products are used when drawing a PPF referring to an economy as a whole?

Answer 3

Capital goods and consumer goods

Question 4

What are capital goods?

Answer 4

Capital goods are used in the production of other goods

Question 5

What are consumer goods?

Answer 5

Consumer goods are bought directly by consumers

Question 6

What do points on a PPF signify?

Answer 6

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

Question 7

Explain what moving along the PPF means in terms of the amount of each of the two goods/services produced

Answer 7

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

Question 8

What can be said when sacrificing the production of one good to increase the production of another when moving along a PPF?

Answer 8

There is a trade off between the production of the two goods

Question 9

What is a trade-off?

Answer 9

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

Question 10

What are all points on a PPF?

Answer 10

All the points on a PPF are productively efficient because all resources are used as efficiently as possible to produce the maximum possible output.

Question 11

Although all points on a PPF are productively efficient, what are they not?

Answer 11

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

Question 12

What does it mean when a point lies outside a PPF?

Answer 12

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

Question 13

What does it mean when a point lies inside a PPF?

Answer 13

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

Question 14

Define opportunity cost

Answer 14

The opportunity cost of a decision is the next best alternative that you give up in making that decision

Question 15

How do consumers use the concept of opportunity cost?

Answer 15

Consumers use the concept to choose what to spend their income on

Question 16

How do producers use the concept of opportunity cost?

Answer 16

Producers use the concept to look at the profit forgone by not making an alternative product

Question 17

How do governments use the concept of opportunity cost?

Answer 17

Governments use the concept to look at the lost value to society from the policies they choose not to implement

Question 18

What are some of the problems of using the concept of opportunity cost?

Answer 18

• 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

Question 19

What do movements along a PPF show?

Answer 19

A reallocation of the same amount of resources

Question 20

What causes a PPF to shift?

Answer 20

A change in the quality or quantity of the factors of production

Question 21

What effect would increased resources have on a PPF and why?

Answer 21

It would cause the PPF to shift outwards as it would mean the total possible output of the economy would increase

Question 22

What does an outward shift of a PPF show?

Answer 22

Economic growth

Question 23

What effect will fewer total resources have on a PPF and why?

Answer 23

It will cause the PPF to shift inwards as the total possible output has shrunk

Question 24

What does an inward shift of a PPF show?

Answer 24

Negative Economic Growth

Question 25

What effect will introducing technology only suited to the production of one good have on a PPF?

Answer 25

It will cause a pivot shift. This means the entire PPF will not shift but it will be stretched

Question 26

What does a straight line PPF mean?

Answer 26

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

Question 27

What does a straight line PPF mean in terms of opportunity cost?

Answer 27

There is a constant opportunity cost when changing between different levels of output

Question 28

Define production

Answer 28

Production involves converting inputs into outputs

Question 29

What can the inputs be during production

Answer 29

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

Question 30

What should the outputs produced during production have?

Answer 30

The outputs produced should have an exchangeable value, they need to be something that can be sold

Question 31

What is productivity a way of measuring?

Answer 31

Productivity is a way of measuring how efficiently a company or an economy is producing its output.

Question 32

Define productivity

Answer 32

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

Question 33

Explain productivity in terms of calculation

Answer 33

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

Question 34

Define labour productivity

Answer 34

Labour productivity is the output per worker or output per hour worked

Question 35

How do you calculate labour productivity?

Answer 35

• 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

Question 36

What can labour productivity be used for?

Answer 36

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

Question 37

How can labour productivity be improved?

Answer 37

• Better training
• Improved technology
• More experience

Question 38

How can specialisation improve labour productivity?

Answer 38

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

Question 39

What does specialisation lead to?

Answer 39

Specialisation leads to a division of labour

Question 40

What is the division of labour?

Answer 40

The division of labour is a type of specialisation where production is split into different tasks and specific people are allocated to each task

Question 41

What are the advantages of specialisation?

Answer 41

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

Question 42

What are the disadvantages of specialisation?

Answer 42

• 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

Question 43

What are the four functions of money?

Answer 43

• A medium of exchange
• A measure of value
• A store of value
• A method of deferred payment