PPF Flashcards
Production Possibility Curve/Frontier (PPC/F)
A curve used to demonstrate the combinations of two goods an economy can produce given its resources.
Assumptions of a PPF
- The economy can produce only two goods
- The amount of resources is fixed
- Each of the goods can be produced using the
same factor of production
Shifts of the PPF - Outward Shift (economic growth)
- An increase in the total amount of resources available to the economy (discovery of raw material)
- An improvement in technology/technological advancements - when technology improves an economy is able to increase its production of goods and services without necessarily having to increase their resources.
- increase in productivity
- increase in working hours
- finding a better method of working
Shifts of the PPF - Inward Shift (economic decline)
a decrease in the total amount of resource available to that economy.
caused by:
* Natural Disasters
* Political Unrest
* Depletion of resource
* Disease
* Decrease/depletion of natural resources
Types of opportunity costs
- Increasing Opportunity Cost
- Decreasing Opportunity Cost
- Constant Opportunity Cost
Increasing opportunity costs
in order to increase production of one good by equal additional amounts, increasing amounts of the other good must be given up.
Increasing Opportunity cost is shown by a convex (curved outward) PPF
Decreasing opportunity costs
occurs when In order to increase production of one good by equal additional amounts, decreasing amounts of the other good must be given up.
Decreasing Opportunity cost is shown by a (inward) CONCAVE PPF
Constant opportunity costs
OCCURS WHEN In order to increase production of one good by equal additonal amounts, constant(equal) amounts of the other good must be given up.
Constant Opportunity cost is shown by a (steep downward hill) LINEAR PPF
Economic growth
refers to the quantitative increase in the productive capacity of the economy. When economic growth takes place production points that were previously unattainable would now be attainable if they were to lie on the new PPF.
Economic decline
This is where there is a quantitative decrease in the productive capacity of the economy. When economic decline occurs production points that were previously attainable now becomes unattainable.
How to read and analyse a PPF
Points A, B, D, E
A & B are points along the PPF.
This implies that resources are both efficiently and fully utilized. This is referred to as full employment of resources. The firm can allocate its resources to produce any of the combinations along the PPF.
At point D the country is producing inside the PPF. Production is inefficient or resources are not fully utilized. This is referred to as unemployed/idle resources.
Point E, which lies outside of the PPF, is unattainable as it cannot be produced given the economies’ current resources.
Opportunity cost
the next best alternative forgone (given up)
Economic Problem
scarcity
free goods
all the gifts of nature which can be obtained at no cost. sunlight, air
are naturally in abundant supply and need no conscious effort to obtain them
economic goods
all the goods and services which consumers must pay for in ordr to consume.
it is useful to people but scarce in relation to its demand so that human effort is required to obtain it.
