MICRO: Production Possibility Frontiers and Opportunity Cost Flashcards
What is a production possibility frontier?
Shows the maximum possible output and the options that are available when you consider the production of just two types of goods and services.
Describe Points A,B,C and D on this PPF.
These points and every point on the PPF are achievable without using any extra resources. Only achievable when all resources available are used as efficiently as possible
What happens moving from A to B?
Moving along the curve from A to B, More houses are built (22500 instead of 1000) but fewer vehicles (80000 instead of 120000)
Therefore, you allocate more resources to house production and fewer resources to vehicle production. Meaning, a tradeoff between “more houses” or “more vehicles.
What is a trade off?
Having to choose between conflicting objectives as you can’t achieve it all at the same time. It involves compromising, and aiming to achieve your objectives a bit.
Why are all points on the PPF productively efficient?
All resources are used efficiently as possible to produce maximum possible output.
However, not all points can be allocatively efficient. Why?
Not all points will reflect the production of goods that people want or need - e.g if all resources were used to produce vehicles, this may not match society’s need to build houses.
What happens in Point E?
It’s outside the PPF, so it is not achievable with current level of resources. Extra or better resources have to be found for that many houses or vehicles to be built.
What happens in Point F?
It’s inside the PPF - meaning it’s *productively inefficient**. You can build more houses without making fewer vehicles (or the opposite)
What is opportunity cost?
The next best alternative that you give up in making that decision
What is the opportunity cost of moving from A to B?
The opportunity cost of building 21500 extra houses is the lost production of 40000 vehicles.
How can economic agents use opportunity cost?
- Consumers can choose what to spend income on.
- Producers look at profit forgone by not making alternative products.
- Govts look at lost value to society from policies they don’t implement.
What are problems of opportunity cost?
- Not all alternatives known
- Lack of info on alternatives and their costs
- Some factors don’t have alternative uses
- Some factors (e.g land) can be hard to switch
What happens if the total amount of resources changes?
The PPF itself moves.
Describe how this PPF moves with a change in resources.
- Increased resources (ie increase in total number of workers) means that total possible output of that economy also increase - so PPF shifts outward
- For this particular economy, the extra output could be either more houses or more vehicles or a combination of both.
How can improved technology or improvements to labour (e.g through training also shift PPF outwards?
It allows more output to be produced using the same resources
When fewer total resources are available (after a natural disaster e.g), what happens to the PPF?
It shifts inwards, showing that the total possible output has shrunk. Negative economic growth
Describe what happens in this particular PPF.
Output grows with improved technology, but this tech only helps with house building. So the PPF stretches in the horizontal direction.
