microeconomics - PPC Flashcards
What is the Production Possibility Curve (PPC)?
a graphical representation of the
maximum attainable combinations of output between two goods that can be
produced in an economy within a specified period of time, when all the available
resources are fully and efficiently employed, at a given state of technology.
What are the 4 assumptions made when using a PPC as part of your analysis?
- there are only 2 goods being produced
- there is a fixed quantity and quality of resources
- all resources are fully and efficiently utilised
- there is a fixed state of technology within the specified time period
What is the shape of the PPC and what concept does it illustrate?
The concave and negative slope of the PPC illustrates the concept of increasing opportunity costs. (i.e. the opportunity cost incurred in the production of a good increases as the output of the good increases)
Illustrate an economy experiencing actual economic growth using the PPC
(diagram shows A movement from a point within the PPC to a point closer to or on the PPC)
explanation framework:
1. Define the PPC and state the four assumptions
2. Here, the (factor) results in more resources being utilised/resources being utilised in a more efficient manner
3. This is represented by a movement from a point within the PPC (point A) to a point on/nearer to the PPC (point B)
4. Thus, the total output of the economy increases and it experiences actual economic growth.
What are the 4 factors that will result in a SHIFT of the ppc curve?
Physical capital goods, LAbour, Natural resources, Technological advancements
(acronym: PLANT)
note: generally, any change in quantity & quality of FOP + level of tech will lead to a shift of the PPC curve)
FOP = capital, entrepreneuship, land, labour
Explain how a change in the factor of LABOUR leads to a shift of the ppc curve.
An increase in quantity or improvement in quality of labour resources will lead to an outward shift of the PPC curve.
For example, a relaxation of immigration policy may increase the quantity of foreign labour in an economy. WIth more workers, an economy is capable of producing more output.
Alternatively, government expenditure on retraining programmes like SkillsFuture may improve the quality of labour resources in an economy. As high-skilled workers are more productive than low-skilled workers, they can produce more output per unit time. Thus, the economy becomes more efficient and capable of producing more output.
Explain how a change in the factor of PHYSICAL CAPITAL GOODS lead to a shift of the PPC curve.
An increase in quantity or improvement in quality of physical capital goods will lead to an outward shift of the PPC curve.
For example, investments in new machines and equipment can increase the output of an economy.
For example, investments to upgrade existing machines and equipment can improve the efficiency of output, hence increasing the output of an economy.
Explain how the factor of TECHNOLOGICAL ADVANCEMENTS lead to a shift of the PPC curve.
An improvement in the level of technology of an economy can improve the productivity of an economy.
For example, workers who work with the latest equipment and machines are more productive and can generate a larger output per unit time. The allows the economy to produce more output.
Explain how the factor of NATURAL RESOURCES lead to a shift of the PPC curve.
An increased quantity or increased efficiency in using natural resources will lead to an outward shift of the PPC curve.
For example, the discovery of new coal mines provide the economy with more FOPs and hence increases its ability to produce more output.
Alternatively, new technologies that allow natural resources to be utilised more efficiently can also enable an economy to produce more output. For example, the Green Revolution allowed economies like India to use its agricultural resources more efficiently and increase crop yield. This thus allows the economy to produce more efficiently to produce more output.
When will the PPC see a pivoted shift? When will it see a parallel shift?
pivoted shift: change in qty / qlty of FOPs / lvl of tech only affects EITHER consumer goods or capital goods
parallel shift: change in qty / qlty of FOPs / lvl of tech affects BOTH consumer goods AND capital goods
Illustrate an economy experiencing potential economic growth using the PPC.
(diagram showing a parallel/pivotal outward shift of the PPC curve)
- Define the PPC and state the 4 assumptions.
- Explain how (factor) leads to an increase in output.
- Hence, this increases the maximum potential output of the economy and allows it to produce a greater quantity of goods. Consequently, its productive capacity increases.
4a. (pivotal) This is reflected in a pivotal outward shift of the PPC curve (from PPC0 to PPC1), as the (factor) affects ONLY the output of capital/consumer goods
OR
4b. (parallel) This is reflected in a parallel outward shift of the PPC curve (from PPC0 to PPC1), as the (factor) affects BOTH the output of capital AND consumer goods.
Illustrate trade-offs / opp cost using the PPC.
(diagram - ppc curve, and label)
- The central economic problem of scarcity is that there are unlimited wants that cannot be fulfilled by limited resources. As such, economic agents are forced to make decisions that incur trade-offs and opportunity costs. Opportunity cost is the next best alternative foregone when a choice is made.
- The concave and negative slope of the PPC curve illustrates the concept of increasing opportunity costs. This means that the opportunity cost of producing a good increases when the output of the good increases.
- Assuming all resources are fully employed, the economy is originally producing at point A of the PPC where the economy is producing 0Q0 of good A and 0Q2 of good B. When the economy chooses to allocate more resources to the production of good B, there will be movement along the PPC from point A to point B. The opportunity cost of producing additional Q2Q3 units of good B is that Q0Q1 units of good A are foregone. Due to imperfect factor substitution, the decrease in units of good A produced (Q0Q1) is greater than the increase in units of good B produced (Q2Q3).
Illustrate the situation of scarcity leading to impossibility using the PPC.
- Define the PPC and state the 4 assumptions.
- The central economic problem of scarcity is that there are unlimited wants that cannot be fulfilled by limited resources.
- Due to resource constraints (limited quantities of capital, entrepreneurship, land, labour available), the economy is unable to produce unlimited quantities of both good A and good B. This is illustrated by the unattainable point C which lies outside the PPC.
Illustrate current vs future standard of living using PPC.
(diagram showing 3 PPC curves, parallel outward shifts - PPC, PPCa & PPCb)
- Define the PPC and state the 4 assumptions
- The concept of opportunity cost means that for every unit of consumer good the economy produces, it must forego the next best alternative of a certain number of units of capital goods. This illustrates the problem of scarcity as there are limited resources to fulfil unlimited wants.
- If the economy makes the choice to produce more capital goods at point b, it forgoes current consumption as there will be fewer consumer goods due to opportunity costs. However, the higher output of capital goods will allow the economy to increase its productive capacity in the future and produce more output in the next period. Consequently, this allows it to increase future consumption by a larger extent, as shown from how PPCb shifts more to the right than PPCa.
The reverse is also true if the economy chooses to produce more consumer goods in the current period (point A). It will then sacrifice future consumption for current consumption. This is shown by the smaller extent of the outward shift of the PPC curve from PPCa to PPCb.
