PPF Flashcards
production possibility fontier
what is the PPF
shows the maximum output potential for an economy when all its resources are fully employed
How does a PPF illustrate opportunity cost?
as you move along the PPF, producing more of one good requires sacrificing a certain amount of the other good.
What does a point inside the PPF curve represent?
- Inefficient allocation of resources, where the economy is not utilizing all of its resources fully or efficiently
- labour not being used up, unemployment
- idle capital
What does a point on the PPF curve represent?
Efficient allocation of resources, where the economy is producing at its maximum potential with the given resources and technology
What does a point outside the PPF curve represent
An unobtainable level of production with the current resources and technology
How is economic growth shown on a PPF?
Economic growth is depicted by an outward shift of the PPF, indicating an increase in the productive capacity of the economy
How is economic decline shown on a PPF
Economic decline is depicted by an inward shift of the PPF, indicating a decrease in the productive capacity of the economy.
What causes movements along the PPF curve
Movements along the PPF curve are caused by changes in the allocation of existing resources between the production of different goods
What causes shifts in the PPF
Shifts in the PPF curve can be caused by changes in the quantity or quality of resources, technological advancements, or changes in trade policies
What is the distinction between capital goods and consumer goods
Capital goods are used in the production of other goods and services (e.g., machinery, buildings), whereas consumer goods are final products consumed by individuals (e.g., food, clothing)
What is the difference between a movement along the PPF and a shift in the PPF?
A movement along the PPF represents a change in the allocation of resources between two goods, while a shift in the PPF represents a change in the economy’s capacity to produce goods due to changes in resources, technology, or other factors
Give an example of a cause for a movement along the PPF
A reallocation of resources from the production of good A to good B, without any change in total resources or technology
Give an example of a cause for a shift in the PPF.
🔹 1. Investment in Capital Goods
→ Higher investment in machinery and infrastructure
→ Increases productive capacity of the economy
→ More goods/services can be produced with same resources
→ Shifts PPF outwards
🔹 2. Improvement in Human Capital
→ More spending on education/training
→ Increases productivity and efficiency of labour
→ Better quality output from the same number of workers
→ Shifts PPF outwards
🔹 3. Discovery of New Resources
→ New natural resources (e.g. oil, minerals) found
→ Increases availability of inputs into production
→ More goods can be produced without increasing opportunity cost
→ Shifts PPF outwards
🔹 4. Technological Advancements
→ Innovation in production methods (e.g. automation)
→ Enables more output with same input
→ Improves efficiency and lowers average costs
→ Shifts PPF outwards
🔹 5. Increased Labour Supply
→ Higher immigration or population growth
→ Expands the workforce available for production
→ Allows more simultaneous production of goods and services
→ Shifts PPF outwards
🔹 6. Improved Institutions & Governance
→ Stronger rule of law, better infrastructure, stable policy
→ Increases business confidence and efficiency
→ Higher investment and long-term productivity
→ Shifts PPF outwards
How does an increase in labor force affect the PPF?
An increase in the labor force would shift the PPF outward, indicating a higher productive capacity
How does a natural disaster affect the PPF
A natural disaster would likely shift the PPF inward, indicating a reduced productive capacity
How do investments in capital goods affect the PPF?
Investments in capital goods can shift the PPF outward, reflecting increased productive potential
Can the production of consumer goods affect the long-term growth of an economy? If so, how?
Yes, prioritizing consumer goods over capital goods can limit long-term economic growth by reducing investments in productive capacity
