Microeconomics - Production Possibility Diagrams

Question 1

What do they show?

Answer 1

depict the maximum productive potential of
an economy, using a combination of two goods or services, when resources are fully
and efficiently employed.

Question 2

What can they also show?

Answer 2

PPF curves can show the opportunity cost of using the scarce resources. For
example, if the scarce resource is milk, there is a trade-off between producing more
cheese or more yoghurt from the milk

Question 3

What is the curve in the diagram called?

Answer 3

production possibility frontier

Question 4

What does producing on the curve show?

Answer 4

resources are being used to their full productive potential so is therefore efficient.

All points on the boundary are productively efficient. This is because resources are
being used to their productive potential so it is efficient.
However, not all points are allocatively efficient. This is because more of one good
cannot be produced without reducing the amount of the other product available.

Question 5

What does producing under the curve show?

Answer 5

resources are not being used to their full productive potential. (unemployment of economic resources) therefore inefficient

Question 6

What does producing above the curve show?

Answer 6

producing above the curve is not yet attainable with the current resources.

Question 7

How can economic growth shown?

Answer 7

Economic growth can be shown by an outward shift in the PPF

Question 8

How can economic decline be shown?

Answer 8

A decline in the economy would be
depicted by an inward shift

Question 9

Allocative efficiency

Answer 9

when no one can be made better off without making
someone else worse off