PPF Flashcards
What is PPF?
The production possibility frontier is a chart illustrating the varying amounts of two products that can be produced when both dependent on the same existing level of finite resources and a constant state of technology.
Does the PPF show?
– The maximum productive potential of an economy
– opportunity cost/trade-offs through marginal analysis
– economic growth or decline
– efficient or inefficient allocation of resources
– possible and unattainable production
What is the capital (investment) good?
– The physical assets used to manufacture
– products produced to produce other valuable products or services over time
What is a consumer good?
The final good, what people buy. Something for everyone to buy.
Define productive
Maximised use of resources
Define allocatively
Maximise the use of resources are consumer demand
What is the term used when all of the resources are being fully employed to produce the maximum possible output?
Pareto efficient
Define Pareto inefficient
When resources are used inefficiently
Why are PPF’s not usually straight lines?
PPF’s are not linear because of imperfect factor substitutions
Why is the PPF a downward sloping curve?
Because of the law of diminishing marginal returns – this says that for every increase in a variable factor of production the increase in output will become smaller and smaller
Can cause a shift in the PPF?
– And increase or decrease in the quantity or quality of resources increases and economies productive potential and chips the PPF outwards inwards
What does a positive shift in the PPF indicate?
Long run economic growth
Long term versus short-term economic growth on a PPF diagram
Long time – the whole curve shifts outwards
Short time – the point of the PPF shifts from inside thePPF onto the PPF curve
What does a change in one industry do to a PPF diagram?
Sometimes a change may come about that affects only one industry. A pivot or skewed shift in the PPF is caused by a change in the productivity of only one good or service
What may cause a PPF to shift inwards?
The depletion of resources due to a war, natural disasters, erosion of infrastructure, running out of oil and gas, declining population, then stopping production.
Under these circumstances, the maximum output of all goods will be reduced shifting the PPF inwards. (Negative economic growth)
