Microeconomics (4.1.1.5) Flashcards
Define a Production Possibilty frontier
A diagram showing the combination of two goods or services that can be produced given the available resources.
Why are PPFs concave instead of being linear?
Because the resources used for the production of each good displayed on the graph is inadaptable. This means there will always be an opportunity cost so the frontier will rarely be straight.
What key term describes the gradient of the frontier?
Marginal rate of transformation
What does the gradient of a PPF signify?
The slope of the PPF indicates the opportunity cost of producing one good versus the other good, and the opportunity cost can be compared to the opportunity costs of another producer to determine comparative advantage.
What can be ASSUMED in a PPF?
That only two goods are produced in the economy
What can be used to describe all points on a PPF?
Productively efficient, not every point is allocatively efficient
Define Productive efficiency
Production efficiency is an economic term describing a level in which an economy or entity can no longer produce additional amounts of a good without lowering the production level of another product
Define allocative efficiency
Allocating resources to the productions of goods consumers want to buy. - (No-one can be made better off without someone else being made worse off)
Define Pareto efficiency
No-one can be made better off without someone else being made worse off
Allocative efficiency (bonus definition)
Price consumers are willing to pay = Marginal cost of scarce resource
Define marginal cost
Additional cost incurred in the production of one more good
What does a point on the frontier curve mean?
The resources (factors of production) available are used efficiently for the production of the goods.
What does a point outside the frontier curve mean?
Production of the two goods are unattainable - not enough resources.
What does a point further down on the frontier curve mean? (Assume good A on y-axis, good B on x-axis)
Resources are available for the production of both goods but more is allocated to good B.
What do PPFs show?
Possible quantitative figure on current outputs of 2 goods in an economy of a certain amount of resources.
What does a point inside the frontier curve mean?
Resources are available but are not efficiently used leading to wastage of scarce resources. There is unemployment.
What does it mean when a PPF frontier shifts inwards?
There is a decrease in productivity and less scarce resources. There may also be more unemployment causing negative economic growth.
What does it mean when a PPF frontier shifts outwards?
Productivity increases (perhaps due to more incentives or new technology) and more scarce resources are available.
Define returns to scale
Ratio of inputs to outputs
Define positive returns to scale
When input < output.
E.g. when input is up by 10%, output is up by 15%
Define negative returns to scale
When input > output.
E.g. when input is up by 10%, output is up by 5%
What does it mean when a PPF is straight?
The opportunity cost and returns to scale are constant.
Define Comparative advantage
An economy’s ability to produce a particular good or service at a lower opportunity cost than its trading partner
