Production Possibility Diagrams Flashcards
What does the PPF explain?
The constraints in society.
What is the slope of the PPF?
The opportunity cost.
Why is the PPF curved?
The law of diminishing returns.
(Marginal benefit from the extra units will eventually start decline)
When do trade-offs occur?
When producing on the PPF.
What does it mean when the point is outside the PFF?
It is not possible to produce at this point.
What does it mean when the point is on the PPF?
All factors of production are in use.
It is productively efficient.
What does it mean when the point is underneath the PPF?
Not all factors of production are employed.
There is a spare capacity in the economy.
Static efficiency
Efficiency at a point of time.
Productive efficiency
With all available inputs and technology, it is impossible to produce more of one good without decreasing the quantity of another good being produced.
Every point on the PPF is productively efficient .
Allocative efficiency
Occurs when a specific combination of goods is sufficient for society.
As this is a specific combination of goods, it refers to a point on the PPF, not the entire curve.
Not every point on the PPF is allocatively efficient.
When will the PPF shift outwards?
When there is economic growth, because productive capacity of the economy has increased.
What do shifts along the PFF reflect?
Reallocation of resources.
When will the PPF curve shift?
When the total level of resources changes:
Increasing resources - PPF shifts outwards as output increases (economic growth).
Decreasing resources - PPF shifts inwards as output decreases (negative economic growth).
How will improvements in labour/technology shift the PPF curve?
Outwards because resources are fixed, but output increases.
