Micro- economic problem: PPF ( some micro) Flashcards
Define PPF
Shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently empolyed.
When is the PPF a straight line?
When the marginal opportunity of switching resources between two goods is constant
What is the law of diminishing returns?
- Law of diminishing marginal returns-> There will be a decreas in marginal ( incremntal) output of production process as the amount of single factor of production is incrementally increased while the amounts of all other factors of production stay constant.
-not all factor inputs are equally suited to producing items leading to lower productivity
-land labour and capital aren’t perfect subsittues
What does a point inside/ behind the PPF curve indicate?
That economy isn’t operating at its full potential level of output. There are unemployed factors of production.
What would cause a move from inside the PPF curve to on the curve? What type of economic growth is it?
Reducing spare capacity in the economy ( e.g. putting idle resources to use). Short-term economic growth.
What does a point outside the PPF curve indicate?
This level of output is impossible with the current quantity and quality of the factors of production.
How could a country try to reach a point outside the PPF curve and what is this called?
-Improving a country’s productive potential by improving the quality or quantity of the factor of production
-long term economic growth
Define PPF
This means that, given the available inputs ( e.g. labour), it’s impossible to produce more of one good without decreasing the quantity of another good that’s produced.
How do you show long-term economic growth on a PPF curve?
Move the curve outwards ( shift) to the right
How do you show short-term economic growth on a PPF curve?
The point will move closer to the PPF curve ( to the right).
What is the trade-off between long-term and short-term when the goods are capital and consumer goods?
-Issue of where to invest resources
-There is a trade-off between long-run and short-term economic growth.
-If you choose to produce capital rather than consumer standards of living in the short term will reduce as resources are diverted away from private consumption
-However, in the long term increased investment in capital goods enables more output of consumer goods to be produced increasing the output of the economy compared to if they didn’t make short-term sacrifices.
Define human capital
Personal attributes considered useful in production processes
What ‘equation’ shows the nature of the circular economy?
OUTPUT=INCOME=EXPENDITURE
What do production possibility frontiers (PPFs) help economists analyze?
PPFs help economists analyze trade-offs.
What do PPFs show?
PPFs show the maximum possible combination of goods/services that can be produced using all available resources.
What is the maximum productive potential of an economy represented by?
The maximum productive potential of an economy is represented by any point along the PPF.
What does the concept of opportunity cost entail?
The production of two more consumer goods incurs an opportunity cost of one capital good.
How can economic growth be shown on a PPF?
Economic growth can be shown by an outward shift in the PPF.
What can cause an outward shift in the PPF?
An outward shift can be caused by an increase in the quantity or quality of the factors of production.
What does an inward shift of the PPF indicate?
An inward shift indicates economic decline, possibly caused by civil war or natural disasters.
What does the concept of efficiency mean in relation to the PPF?
Any point on the PPF is productively efficient, where factors of production are used to their maximum potential.
What is considered inefficient in relation to the PPF?
Any point inside the PPF is inefficient, as some factors of production are unemployed or under-employed.
What does possible production refer to?
Possible production refers to anything under or on the PPF.
What is an example of unobtainable production on a PPF?
An example of unobtainable production could be point Z because it is beyond the PPF.
What should students distinguish between in the context of PPFs?
Students should distinguish between capital and consumer goods.
How might economic growth be affected by resource allocation?
Allocating more resources to the production of capital goods can affect economic growth.
