Nature Of Economics (Q25-Q39) Production Possibility Fronteirs Flashcards
25.What is another term for PPF
Transformation curve.
26.What does a PPF show?
It shows the maximum potential outcome of an economy if all factors of production are used efficiently and at the current rate of technology. Also the combinations of two different goods.
27.Draw a PPF Showing country x producing only capital goods and consumer goods.
See notes.
What does it mean if a point is inside the PPF
This would mean that the country’s factors of production are not being used efficiently (unemployed resources)
28What is marginal analysis?
Marginal analysis is concerned with the impact of additions and subtractions from the current situation.
A rational decision will always make sure the marginal benefit outweighs the marginal cost.
Sketch a PPF to show the concept of opportunity cost.
See notes.
The marginal cost would be what is lost on the PPF and the marginal benefit would be what is gained.
Explain the opportunity costs that could arise on a PPF based on consumer and capital goods.
If an economy wanted to produce more consumer goods, it would have a diminishing return in capital goods.
Therefore the opportunity cost of more consumer goods is less capital goods.
Why are PPFS concave?
Because they can help to represent increased opportunity cost with higher production of a good.
What does a point outside the diagram indicate?
A point outside of the PPF is a level of output that economy cannot achieve with the current resources and level of technology.
What does a shift to the right of the diagram represent?
What are the possible reasons for this?
A shift to the right of the diagram would mean a higher output by the economy.
New discoveries of natural resources for example oil.
Innovations that have caused increased productivity.
New training that has increased skills increasing productivity.
What would a shift to the left of the PPF suggest?
Why could this be caused by?
(4 reasons)
It suggests that the economy is working a lower output level
This could be due to a natural disaster causing a destruction decreasing productivity.
A depletion of natural resources.
A recession resulting in a loss of productive capacity.
Emigration (people leaving the country) making a smaller workforce.
Why might a PPF become steeper?
Because as an economy produces more and more of one product the costs relative to the other goods and services increase increase.
Why might a PPF become shallower?
When the costs of one good are lower relative to the other good on the PPF
Draw a PPF diagram with 2 countries shown, country X and country Y. 2 goods are being
produced Consumer goods and Capital goods. Draw the diagram such that the opportunity
cost of producing capital goods is greater for country X than it is for country Y
See sheet.
If an economy X produces only consumer and capital goods, what will be the short term and
long term affect if country X increases its production of capital goods?
The short term effect will be that it will have lower output of consumer goods meaning less consumer goods in the economy.
The long term effect is that it will have more consumer goods in the future as it will have more capital goods to be used in production.
