Non-Optimal combinations

Question 1

Idle Resources

Answer 1

In economics, the term “idle resources” refers to money, capital or labor that is being wasted. Because an economy’s production possibilities curve assumes the full use of the factors of production available to it, the failure to use some factors results in a level of production that lies inside the production possibilities curve.

Question 2

Producing on VS producing inside the curve and what causes an economy to produce within a curve?

Answer 2

Producing on the curve is better than producing inside the curve. Two things can leave an economy at a point inside it’s production possibility curve:

• the economy might fail to use fully the resources available to it
• second it might not allocate resources on the basis of comparative advantage

Production within the curve always indicates that the economy is not at allocative efficiency.

Question 3

What are unachievable output combinations perhaps leading to inflation

Answer 3

Any point outside the PPF, is currently beyond the economy’s productive capacity because there are insufficient resources to enable such high levels of output. Any attempt to operate at this level would likely cause inflation as there’d be a general shortage of resources.

Question 4

What is Allocative Efficiency?

Answer 4

An efficient allocation of resources (called allocative efficiency) is described as a desirable situation where resources are used to produce particular goods and services that best maximise the overall satisfaction of society’s needs and wants, wellbeing or living standards. This can be identified on the PPF where output is at it’s limit. In economic terms, any production point that is within the PPF is using resources inefficiently.

Question 5

What are the aspects affecting efficiency in allocation of resources?

Answer 5

1. Productive/Technical Efficiency - implies using the lowest cost production methods, and minimising wastage of resources in making goods and services.
2. Dynamic Efficiency occurs when resources are reallocated quickly to increase choice and meet the changing needs of consumers.
3. Intertemporal efficiency refers to finding the optimal balance between current consumption or the spending of income versus saving income to finance investment and hence future consumption.